How Does the Exercise Style Affect the Hedging Strategy for an Options Seller?

The exercise style significantly affects the hedging strategy for an options seller (writer). For European options, the seller only needs to hedge against the final settlement price, simplifying the strategy.

For American options, the seller must constantly account for the risk of early exercise at any time. This requires a more dynamic and conservative hedging approach, often involving a more frequent adjustment of their delta hedge to maintain a safer position.

This constant re-hedging increases transaction costs and complexity for the seller.