ALAB Delta Exposure (DEX)

What is Delta?

Delta measures the rate of change between an option's price and the underlying asset's price. A delta of 0.50 means that for every $1 change in the underlying stock's price, the option's price will change by approximately $0.50.

What is Delta Exposure (DEX)?

Market makers and dealers must continuously adjust their hedging positions based on their options' delta values. This process is called delta hedging and is necessary because dealers aim to maintain neutral market exposure.

Delta exposure represents the estimated dollar value of shares that market makers must hedge for every one-point change in the underlying asset's price.

When dealers are net long delta, they have a positive directional exposure and must sell the underlying stock to maintain a neutral position. This creates selling pressure on the stock.

When dealers are net short delta, they have a negative directional exposure and must buy the underlying stock to maintain a neutral position. This creates buying pressure on the stock.

The Net Delta Exposure chart shows green bars (positive y-value) when dealers are net long and red bars (negative y-value) when dealers are net short. The magnitude indicates the strength of the potential buying or selling pressure.