# What is delta hedging and how does it work in crypto?

- Delta hedging is a strategy used in options trading to reduce the risk associated with price movements in the underlying asset.
- It involves using options to offset the risk to either a single other option holding or an entire portfolio of holdings.
- The goal of delta hedging is to reach a delta-neutral state, meaning the portfolio is not affected by price movements in the underlying asset.

## Understanding Delta

Delta, represented by the symbol Δ, is a metric that measures the change in the price of an option's value, given a $1 change in its underlying asset. It often ranges from zero to one and can either be positive or negative depending on the option contract being a call or put.

The calculation of delta is typically based on the Black-Scholes model. Its numeric value can be derived by dividing the change in the value of the option by the change in the value of its underlying asset.

## How Delta Hedging Works in Crypto

In the context of [cryptocurrency](/content/learn/crypto-basics/what-is-cryptocurrency/index.html), delta hedging can be used to mitigate the risk of price [volatility](/content/learn/crypto-basics/what-is-volatility/index.html).

For instance, if you own 1 [BTC](/content/learn/crypto-basics/what-is-bitcoin/index.html) and you're unsure about [BTC](/content/price/bitcoin/index.html)'s price movement after an upcoming event, you can hedge against this portfolio with a current delta of 1 by buying put options with a delta of -0.4.

This gives an overall portfolio delta of 0 since the negative delta from the purchased [BTC](/content/price/bitcoin/index.html) put options is neutralized by the positive delta of the [BTC](/content/price/bitcoin/index.html) you own.

## The Challenges of Maintaining a Delta Neutral Crypto Portfolio

Maintaining a delta neutral [crypto](/content/learn/crypto-basics/what-is-cryptocurrency/index.html) portfolio can be challenging due to factors like changing implied [volatility](/content/learn/crypto-basics/what-is-volatility/index.html) and theta decay. The hedge set up against the 1 [BTC](/content/learn/crypto-basics/what-is-bitcoin/index.html) holding will likely become imperfect over time.

Options have dynamic deltas that constantly fluctuate because of gamma, which measures the rate of change of an option's delta per $1 change in the underlying asset.

This complexity requires crypto option traders to keep an eye on their positions in the long run.

## Writing Delta Neutral Options Strategies

Delta neutral options strategies are used among options sellers who write contracts and aim to benefit when they expire out-of-the-money (OTM).

One example of such a delta neutral option strategy would be a short strangle. In this strategy, [crypto](/content/learn/crypto-basics/what-is-cryptocurrency/index.html) options traders will look to sell the put contract and the call contract. This will create a delta neutral options strategy as the delta from the call contract is offset by the delta from the put contract.

## The Final Word

Delta hedging is a complex strategy mainly used by institutional traders and investment banks. It requires a constant rebalancing of the hedge and a keen understanding of how [crypto](/content/learn/crypto-basics/what-is-cryptocurrency/index.html) options work.

Despite its complexity, it can be a tool for advanced crypto traders to mitigate risk and receive compensation from writing contracts for any impending [volatility](/content/learn/crypto-basics/what-is-volatility/index.html).