# Tag Info

suppose you sell a K = 105 call. When the stock reaches exacty 105 you buy 1 stock at 105. Now suppose the stock moves to 104.99, using your logic you sell 1 share at 104. You lost $0.01. Again, after a while stock reaches 105 you buy 1 stock. After some time it goes up, but eventually it goes down again below 105. Thus you sell 1 share below 105. Again ... 0 Delta hedging implies, loosely speaking, buying a proportion (delta) such that small movements in underlying have no net impact. What you have done with 100% and 0% is, in effect, bought the shares to COVER your position, if the deal goes south. Let's work this out with an example. Say you have a stock trading at \$1 and you WRITE a call with strike \$10. ... 1 If you have many strikes of european-exercise options for two dates$T_1$and$T_2$, then the option skew$\sigma_{1,2}(x)$implies model-free risk-neutral probability distributions$p_1, p_2\$ for each of these dates, $$p_i(x) = {\left. \frac{\partial^2 }{\partial x^2}\right|} BS_{\text{Call}}(S_0, x, \sigma_i(x), r, T_i, q)$$ ...