Hi Harish,
What is a delta, to understand one needs to read the Greeks of the option? All most all brokers web site provide this information, in addition one can read at the web site of yahoo as well as BSE and NSE also. In laymans language the delta of an ATM (At the Money) Call option is +. 50 and the Put option is -.50. Once the option is in the money the delta keep increasing as the stock price keep rising. Deep in the money (ITM) options have almost 1 delta. (-1 in case of Put Options). All stocks have +1 delta for Long Stocks and negative One (-1) for Short Stocks.
Most market makers do not hold the risk in their hands for more than 6 seconds (In USA). Depending what order they receive, immediately they off load the risk by bringing their position to delta neutral position. They are able to do because the margin requirements of Market Makers are far less than that of Traders.
Let us consider that the MM has received order for 10 Nifty Call Options (10X100=1000 X +. 50 (ATM has .50 Delta)= +500. MM as soon as fills this order he is risking 500 Delta. So he in real sense is negative 500 delta because he sold positive delta. In order to hedge his position he will go long 500 future contracts as each contract has +delta (+1). From time to time he will than adjust his position to bring it to delta netural and thus will avoid any risk in the market. In the end the option sold will expire and he will capture all the time value of the option.
Think of a Race Bookie, They offer lowest odds for the favorite horse and the least favorite horse will have the highest odds. Though, they try to give better odds on least favorite horses, by doing this they try to match their liability (In case the favorite wins) to the premium they have collected, by offering higher odds on the other horses, participating in the race, thus reducing their risks. It is not a new method; this has been going on for years.
In order that most members of the Traderji forum can get benefit from such strategies, I will start another trade, which is rather going to be much simpler. It will be just Long Nifty Futures and Long Put option. Please keep coming back.
I am sorry; as I have not been able to understand the question 4, please explain the same once again.
Regards,
Wastej