Delta hedging using covered call: a profitable and less risky investment strategy

Abstract

All of us are familiar with the term option contracts, the derivative instrument which are quite common among active traders. In Indian market scenario index options are much popular compared to stock options with a few exceptions. The derivatives market is considered to be a dangerous one and most of the traders who have started trading in derivatives have burnt their fingers just because of not understanding the concept of „time value‟.Thus don‟t expect exceptional profits from options or futures contract but expect a reasonable gain of close to 25% per annum if you properly hedge your positions and then trade. The trades are executed through options contracts and that too an index option with the help of greek‟s of options like delta, theta gamma and vega. As has been pointed out by a number of researchers, the normally calculated delta does not minimize the variance of changes in the value of a trader‟s position. This is because there is a non-zero correlation between movements in the price of the underlying asset and movements in the asset‟s volatility. The minimum variance delta takes account of both price changes and the expected change in volatility conditional on a price change.