delta exposure (dex)

Once we have "how many," how do we know what effect it will have? The simplest solution is delta (Δ).

Delta measures how much an option's price will change for every $1 change in the underlying. By convention, delta is positive for calls and negative for puts. 100 × Δ tells us how many shares (long or short) someone would need in order hedge their option. 100 × Δ × OI gives us the shares required to hedge open interest at that strike. Because our preference is to know the capital required for this hedge, we multiply this result by the share price.

Performing this operation for all strikes and summing the result gives us the capital required to hedge the entire complex. Finally, call dex and put dex can be netted out for cleaner visualization. Because we've translated options positions into a capital requirement, we can more easily understand the impact of movement in the underlying: When the underlying increases by 1% the notional hedge will increase by approximately 1% as well. This value is approximate, because deltas are not constant, so read on.