TradeStation Help
Following is an example of how you might use a hedge ratio. Let's say you have a long position of 200 shares in XYZ, which is currently trading at $125/share; however, you are concerned that you may experience a loss if XYZ decreases in price. To prevent a loss, you want to hedge your long position in XYZ.
A long position has a positive delta value, and in this case +1 for each 100 shares for a total of +2 deltas. To hedge your position using options, you will need to use options with negative values, possibly short calls. The hedge ratio you could use would be:
| Position | Delta | |
|---|---|---|
| Long position in XYZ of 200 shares | = | + 2 |
| Short 4 XYZ 125 calls w/ -0.5 delta | = | -2 |
| Resulting delta | = | 0 |
The Position Analysis window calculates the deltas for you by adding the deltas of the options you are considering together with the delta of the underlying asset. You are then able to see whether or not your potential hedge ratio will result in a near 0 delta.