Delta Hedging

Delta hedging is how option dealers neutralize directional exposure: delta measures how much an option's value changes per one-point move in the underlying, and dealers buy or sell the underlying to offset the aggregate delta of their book. That continuous re-hedging is the transmission mechanism between options positioning and the underlying's price action.

Every option has a delta - its directional sensitivity to the underlying. A market-maker who fills customer orders accumulates a book full of deltas they did not choose, so they trade the underlying to bring the net back to zero. The goal is to earn the bid-ask spread while staying directionally flat.

The hedge does not stay put. Delta itself changes as price moves (gamma), as time passes (charm), and as implied volatility shifts (vanna) - so dealers re-hedge continuously. When the options book is large relative to the underlying's liquidity, that re-hedging flow is big enough to influence the price itself.

This is why options positioning matters for markets at all: the hedging is systematic and rule-driven rather than discretionary, which makes its direction partially anticipatable from an estimate of the dealer book. Those estimates are inferences, not observations - the standard caveat for all positioning analytics.