In today’s Best Practices segment, we distinguish between two types ofexposure and how they can influence P/L.
When, it’s important to understand whether your directional exposure (delta) is constant or dynamic as a stock moves. Even if a trader is delta neutral on entry, it can change quickly when working with dynamic delta.Static Delta
Static delta does not change in value even if the price of the underlying moves. Stock and Futures contracts both have static delta and allow traders to keepconsistent.
For instance, if short 100 shares and the stock moves up $1, the delta exposure does not change.Dynamic Delta
Dynamic delta is found in options and is influenced by changes in the price of an underlying and will update over time. One such example of dynamic delta is a short Put Vertical Spread (a positive delta position). After enough upward movement in the stock, the position will still be “long,” but will stop making money on bullish moves.
Dynamic deltas are influenced by DTE, volatility and changing stock prices whereas static delta never changes. Therefore, when spreading risk off with pairs trades it’s important to keep in mind your static and dynamic deltas.