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Non-Tech : Derivatives: Darth Vader's Revenge -- Ignore unavailable to you. Want to Upgrade?

To: Michael Friesen who wrote (967)	10/15/1999 9:41:00 AM
From: Henry Volquardsen	Respond to of 2794

Hi Michael, delta hedging is options terminology and very simple. It is how you manage an options position. All delta is is the rate of change of an options price relative to the price of the underlying. If the delta is 50% and gold moves $1 the option should move 50%. Delta measures how much in or out of the money the option is and can also be looked at as the odds of exercise. So delta is a pretty common analytic and used in all options structures. The trade you describe is what I would refer to as a 'no-cost' collar or a synthetic sale. It does appear that a number of companies utilized this strategy, buying puts to sell their production and selling out of the money calls to finance the cost of the puts. But delta is a dynamic tool and you can't just set a ratio and walk away as some did. Delta changes as the price rises and in this scenario would have told them that they were getting short and needed to cover part of the position, either by buying spot or buying back some of the call. So technically if they had been delta hedging they would have been buying gold all the way back up and would not have gotten into trouble. Henry