Hedge Ratio Analysis

What is the Hedge Ratio? The hedge ratio is a powerful tool for predicting market behaviour, pinpointing the exact levels on an index where dynamic delta hedging will likely trigger significant buying or selling activity. It allows traders and investors to anticipate shifts in market momentum and identify where futures trading will intensify, providing a strategic edge.

The Predictive Power of Dynamic Hedging: Dynamic hedging is the process of continuously adjusting a hedge to stay neutral as market conditions change. When managing a non-linear position, such as options, with linear instruments like futures, the sensitivity to price changes (delta) shifts as the underlying asset's value fluctuates. To maintain a balanced, zero-delta position, the hedge must be adjusted frequently. This constant recalibration is known as dynamic hedging, and it's where the hedge ratio steps in, offering a roadmap for where these adjustments will occur across the market.