Explain the steps in carrying out a delta hedge
The idea
A delta hedge adds enough of a hedging instrument that the position's deltas sum to zero, so small moves in the underlying do not change its value. The number of hedging units needed is N = −(portfolio delta) ÷ (delta of the hedging instrument). A dealer short calls buys shares equal to calls × delta; a shareholder buys puts numbering shares ÷ |put delta|. Because delta changes as the price moves and as time passes, the hedge holds only for small moves and must be rebalanced, buying more shares after a rise when short calls. The trap is multiplying by the put delta instead of dividing, or selling when the hedge requires buying.
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