IncomeShares ETPs Now on Deutsche Börse Xetra

IncomeShares by Leverage Shares

Author

Jonathan Hobbs, CFA

Date

08 Jan 2025

Category

Market Insights

Delta Hedging Explained: Basic Guide For Options Traders

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

fFIieLb08kHN55EehmjnyvRZg3jqPfizUGoq8Rrs.webp 11.67 KB
Delta hedging is a strategy options traders use to manage risk. It can help balance gains and losses when the price of an underlying asset moves. This guide will explain how delta hedging works and why it matters in options trading. 

What is delta hedging? 

Delta measures how much an option’s price is expected to change with a $1 move in the underlying stock (or asset). Think of it as a measure of the option’s price sensitivity to the stock.  

Delta hedging means adjusting your portfolio to offset that sensitivity. The goal is to reduce the impact of stock price moves on your option position. 

For example, if a trader owns a call option with a delta of 0.5, the option’s price will move by $0.50 for every $1 change in the stock price. To delta hedge this exposure, they might sell 0.5 shares of the stock per option contract. This approach can help reduce their delta exposure to zero temporarily, which might be useful in times of market volatility. 

Keep in mind, delta changes as stock prices move and as options get closer to expiration. That means delta hedging isn’t a set-and-forget strategy – it’s something traders need to actively manage. 

Why use delta hedging? 

Delta hedging can help traders: 

  • Manage risk: It can reduce exposure to sudden price shocks. 
  • Stabilize income: It can help maintain steady income when combined with options strategies like selling calls or puts. 
  • Limit volatility: By offsetting price sensitivity, it can smooth portfolio performance. 

Delta hedging can be useful for options-based ETPs (exchange-traded products) that aim to generate income, like those offered by IncomeShares EU. By managing delta exposure, these products might help stabilize returns and dampen the effects of price swings in the underlying stocks. 

Example: delta hedging with Coinbase stock (COIN) 

Suppose a trader has a position in Coinbase stock (COIN) and sells a call option as part of a covered call strategy. Here’s how delta hedging might work: 

1. The call option

  • Strike price: $300
  • Current COIN price: $270 
  • Delta: -0.6 (selling a call option creates a negative delta, as the option price decreases when the stock price rises). 

2. The delta hedge

  • The trader buys 60 more shares of COIN to hedge the -0.6 delta (-0.6 × 100 shares per option contract). 
  • If COIN rises $1 to $271, the option loses $0.60 per share (100 × -$0.60 = -$60), but the long stock position gains $60.  
  • The net effect is neutral, as the gain from the stock offsets the loss from the option. 

3. Monitoring and adjusting the hedge to stay “delta neutral”

  • As COIN’s price moves, delta changes.  
  • Delta can change more rapidly as options get closer to expiration—a concept influenced by gamma
  • The trader will need to monitor and adjust the delta hedge by buying or selling shares to stay delta neutral. 

kTVKd8mrioyPZJLAEQuYekL5P26cpguUV1OVtfIq.webp 36.83 KB

This strategy could potentially reduce the impact of COIN’s price moves on the trader’s portfolio – while seeking income from selling call options. 

Delta hedging and IncomeShares EU products 

At IncomeShares EU, our options ETPs involve managing delta exposure. For example: 

Covered call strategies: Selling call options to generate income while holding the underlying asset naturally manages delta exposure. 

Put-writing strategies: Selling puts to earn premiums while managing risk with cash-secured positions also adjusts delta as market conditions change. 

Active delta hedging can complement these strategies to mitigate the effects of sharp price swings in the underlying assets. This approach can potentially help stabilize income generation in options ETPs. 

Key takeaways 

  • Delta hedging is a strategy to balance the impact of price moves in a portfolio. 
  • It involves adjusting stock positions to offset an option’s delta. 
  • It can be useful in strategies that focus on income generation with options. 
  • Example: In a covered call strategy with Coinbase stock, buying additional shares can potentially hedge delta and manage risk. 

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

Related Products:

Strategy

Covered Call

Distribution Yield

118.69%

Strategy

Cash Covered Put

Distribution Yield

107.06%

Strategy

Cash Covered Put

Distribution Yield

145.70%

This is a marketing communication. Prospective investors should refer to the Exchange Traded Product (“ETP”) Prospectus and Key Investor Information Document (“KIID”) before making any investment decisions.

No Legal or Investment Advice

The information on this website does not constitute legal, financial, or investment advice. It should not be considered an offer to sell or a solicitation to buy any security, including shares of any ETP promoted here, or other financial instruments, products, or services offered by Leverage Shares or its distributors (“Leverage Shares”).

Investment Advices Client Services

Leverage Shares constructs and issues ETPs but does not provide services to private investors, nor does it accept client funds directly. Leverage Shares’ services are exclusively available to professional clients, as defined in this website’s Terms and Conditions. Private investors should consult their personal advisor, broker, or bank for investment or trading inquiries. For technical questions regarding our ETPs, please contact us directly.

Investment Decisions

Any investment in promoted ETPs should be based on the official sales Prospectus, the relevant Supplement, and the KIID, which outline the applicable terms and conditions.

Investment Risks

Investments in ETPs are subject to risk, including potential loss of principal. The value of investments may fluctuate, and investors may not recover the amount originally invested. Past performance is not indicative of future results and should not be the sole factor considered in selecting a product. Investors should carefully consider their investment objectives, risks, charges, and expenses before investing.

Documentations Availability

The Prospectus, KIID, and other relevant documentation are available free of charge on this website, and upon request via email. Please note that except for KIIDs, documents are generally available in English and selected other languages.

Regulatory Information

Retail clients should not rely on information provided here and are encouraged to seek guidance from a qualified IFA.

Not Insured — No Bank Guarantee — May Lose Value

This is a marketing communication. Please refer to the Prospectus of the ETPs and to the KIID before making any final investment decisions.

This information originates from Investium Limited, which has been appointed as distributor of Leverage Shares products in Europe by Leverage Shares Management Company Limited (the “Arranger”). Investium Limited with registered address at 6 Nikou Georgiou Street, Office 302, 1095 Nicosia Cyprus, is a financial services provider regulated by the Cyprus Securities and Exchange Commission (CySEC).

The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice. Investium Limited and the Arranger (together referred as “Leverage Shares”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of Leverage Shares. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed.

All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of Leverage Shares.

© Leverage Shares 2025