How it Works ⏩ Understanding Notional Delta Figures

"$600M delta for sale"

What you see here is probably the most common way to hear delta expressed on the institutional / flows side...

—it's "notional" delta.

 Starting with an options trade -

...how do we get there?

⚙️Here's my brain's workflow...

Columns H & I

Trade quantity & "Delta" of the option.

Multiply them together for dollar delta*

This number reflects how much money the position makes or loses for a simple $1.00 change in the index level.

So for this combined position of 10k put spreads, he stands to make $215k if the index drops ONE DOLLAR (yes... from 5524 to 5523!)

*the SPX contract multiplier is already accounted for in column I... multiplying by 100 turns the decimal into an integer.

Column K

But as a market maker, you're always thinking in terms of your hedge asset (like it or not).

So naturally I want to know: "how many minis is this equivalent to?"

This is as simple as taking the Dollar Delta we just calculated (Column J) and dividing it by the ES future multiplier (50)

-215k delta = -4,300 ES futures

(this is what MMs had to sell to hedge the trade)

Column L

And finally: "notional"

This takes Column J and multiplies it by the SPX level reference (I used 5525 at the time)

This is kind of like answering the question:

"IF you had to equate this to an actual position in the underlying asset, what is that position's value right now?"

= dollar delta * underlying price level

= $1.187bn combined notional delta

Behold. . .
...the power of LEVERAGE 🥂