How Does Delta Hedging Relate to the Rebalancing of a Short Option Position?
Delta hedging is a strategy used by option sellers to reduce directional risk. It involves buying or selling the underlying asset to keep the overall portfolio delta near zero.
When an option position is short gamma, a small move in the underlying asset causes a large change in delta. This forces the hedger to frequently adjust their position (buy or sell the underlying) at increasingly unfavorable prices, which is the source of the hedging cost or 'realized loss.'
Glossar
Delta Hedging
Framework ⎊ Delta hedging, within cryptocurrency derivatives, represents a dynamic risk management strategy designed to neutralize the directional exposure arising from options positions.
Rebalancing
Process ⎊ Rebalancing is the systematic process of adjusting the weights of assets within a portfolio to restore a target allocation or risk profile, a necessity in the dynamic world of derivatives.