Delta hedging is an options strategy that aims to be directional neutral by establishing compensating long and short positions in the same underlying asset.
By reducing directional risk, delta hedging can isolate changes in volatility for the options trader.
One of the disadvantages of delta hedging is the need for constant monitoring and adjustment of the involved positions. It may also incur trading costs as delta hedging is added and removed as the underlying price changes.
A horizontal spread is a simultaneous long and short position in derivatives for the same underlying asset and strike price, but with different expiration dates.
Boundary conditions were used to establish the minimum and maximum possible values of call and put options prior to the introduction of binomial tree and Black-Scholes pricing models.
Deep-in-the-money options have strike prices that are significantly above or below the market price of the underlying asset and thus contain mostly intrinsic value.
The extrinsic value is the difference between the market price of an option, also known as its premium, and its intrinsic price, which is the difference between the strike price of the option and the price of the underlying asset.