Dynamic Hedging Vault ELI5

"to be delta neutral if number go down 1 every second then another number need to go up 1 every second." - iwo

Dynamic Hedging ELI5

Dynamic (Delta) Hedging is an options strategy that aims to reduce the directional risk associated with price movements in the underlying asset. This can be done by buying or selling options, purchasing the underlying asset in spot markets, or using other derivatives such as futures/perpetuals to target a delta of 0.

Delta is the sensitivity of the value of a derivative (or a portfolio consisting of derivatives) with respect to an underlying asset price movement. A portfolio with a high, positive ETH delta exposure will see its value quickly rise as the price of ETH rises. Inversely, a high, negative ETH delta exposure will result in losses if ETH appreciates but gains if ETH depreciates. A low delta exposure means that a portfolio’s value is not affected much by price movements.

For example, one could purchase a call option with a delta of 0.4 as well as a put option with a delta of -0.4. The sum of the individual deltas (0) is the total delta exposure of this simple portfolio. The portfolio would be delta neutral.