Delta Hedging Cheatsheet

A Comprehensive Guide to Delta Hedging and Gamma Levels

Delta hedging cheatsheet is the foundation of this guide, where we walk through our Delta Hedging Checklist, explain the delta hedging mechanism, and highlight why Gamma Levels are essential for managing your trading plan.

For those familiar with our Q-Models, we analyze the options chain and Greeks to calculate GEX (Gamma), VEX (Vanna), and DEX (Delta) exposures. This framework allows us to generate Key Levels for the next day’s price action.

Let’s begin with a few important resources to help you better understand the topic.

These Key Levels allow you to filter a lot of the noise in the market. For example, knowing if we are in positive or negative gamma can help us understand intraday price volatility. Based on that we can then tailor our spread or directional strategies. More here on positive and negative gamma here.

Delta Hedging Cheatsheet

We have created a dedicated guide on Delta Hedging.

We are interested in delta hedging, because by following how market makers hedge, we can get a sense of potential market movements. That can be helpful if you trade or risk manage.

What moves that Delta?

As the market moves throughout the day, the delta of the market maker’s portfolio will change. Since the market maker hedges with the underlying (mostly), knowing whether he is buying or selling can help us understand the liquidity in the market. This data can then be used with other Q-Models Indicators like the 1D Expected Move. You can read more about the indicator here.

The Delta of the market maker’s book is dynamic, and so are the greeks. It would be wrong to assume that changes in spot price is the only component that affects that delta movement. The option market is multi dimensional compared to the futures one.

As an option’s trader you have to also understand how time and volatility are playing a part. In this sense, we suggest checking out this article we wrote about Vanna. Vanna helps us understand how volatility affects delta. The other greek you want to focus on is Charm – effect on the passage of time on the delta.

Delta Hedging Mechanism

We are going look at how a market maker is hedging when an investor is:

Short a Call
Long a Put
Long a Call
Short a Put

We will look at the investor positioning and the market maker positioning at:

At Market Open
Re-Hedging after the stock price moves
At Expiration

The exercise is mostly directed to shorter term time frames. The objective, and what we do in the Trading Rooms every morning is to understand current positioning and estimate next day moves. We will show you what key data you can use in the morning for your set up:

Net GEX
Open Interest & Volume Profile
Open Interest * Implied Volatility Profile
1D Expected Move Indicator

You can also check a Case Study we wrote about how to manage short term momentum.

Delta Hedging Checklist

This checklist will help you think through how certain positioning by the investors (that you are estimating) may drive market makers’ delta hedging.

Let’s say, on a specific date, the market reaches a key level. The assumption is that most of that positioning around key levels are investors’ long calls. If we eliminate for a second volatility and charm, let’s think about what may happen to the market maker’s positioning if the price goes up or down. This is what these charts should help you out with.