Today I want to take a quick look at how to delta hedge an iron condor.
Let’s assume we’ve got the following iron condor in NFLX that has become skewed to the upside.
Let’s also assume that we don’t want to adjust the condor because we think NFLX is unlikely to get above 600 at expiry, but we’re worried about further upside in the short-term leading to a bigger unrealized loss.
Delta Hedge Rather Than Adjust
Instead of doing a standard iron condor adjustment, we can delta hedge through buying some shares of the underlying stock.
If we want to do a full delta hedge, we would buy 9 shares of NFLX which then gives the overall position a delta of zero (for now). Remember that delta will be constantly changing as time passes and the stock moves.
Buying 9 shares of NFLX at this price would cost $4,796.82 so trader’s would need to ensure they have enough capital in their account to cover this and any ongoing margin requirements.
Notice that the T+0 line is now much flatter than it was previously. The expiration payoff line has also changed.
If NFLX continues to rally, any further losses on the condor will be partially offset by the long stock hedge.
If NFLX drops back down towards the middle of the condor, we can simply remove the hedge for a small loss and go back to managing the condor a
We can also do a partial delta hedge and buy just 5 shares.
Delta hedging is a quick and easy way to temporarily remove some of the price risk on an iron condor (or any option trade for that matter).
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
