Financial spread betting can be a lucrative way of making money. Some people love the challenge for making something extra, while others make a living from this. To be able to make a profit you need to understand the options involved and how it affects your profits.

Delta movements

In spread betting the delta is the change in price of an option. It must be noted that deltas change when there is movement up and down in the value of the option. When the delta of a spread is close to zero it is called a neutral delta. When a spread is neutral delta, the value of the spread will not change with small price movements of the stock.

However, when there are large changes, the spread will have to be adjusted. This is done through selling or buying options or shares. A strategy used by option sellers to stay delta neutral and protect their exposure is called delta hedging. When there are small movements of the underlying asset, a seller matches the market response.

Option buyers are not affected as their initial premium limits their potential loss. To calculate a delta hedge, the option seller takes into account factors such how much time is left before expiry and changes there may be in the spot price.

To calculate how much hedging should be done to be delta neutral, the option writer uses a measurement called a delta variable. The amount of hedging will depend on how much in-the-money or out-of-the-money an option is to bring it to neutral delta.