what is delta hedghing? explaning black schole model

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Delta hedging is a sophisticated investment strategy used to reduce directional risk. The goal is to create a delta-neutral portfolio where the value remains stable despite small changes in the underlying asset price. This is achieved by taking offsetting positions based on the option's delta. Delta is one of the most important Greeks in options trading. It measures how much an option's price will change for every one dollar change in the underlying stock price. For example, a delta of 0.60 means the option price increases by 60 cents when the stock price rises by one dollar. Delta changes as the stock price moves, which is why hedging requires constant rebalancing. Delta hedging works through a systematic process. First, calculate the option's delta using the Black-Scholes model. Then, take an offsetting position in the underlying stock. For example, if you own a call option with delta 0.60, you would short 60 shares per contract. As the stock price moves, delta changes, requiring periodic rebalancing to maintain the hedge. This creates a delta-neutral portfolio with minimal directional risk.