What Is the Difference between Dynamic and Static Hedging?
Dynamic hedging involves continuously or frequently adjusting the hedge ratio (the amount of the underlying asset held) as the Delta of the option changes. It is necessary for options with high Gamma.
Static hedging involves setting up a hedge once, typically with a combination of options, and holding it until expiration without adjustment. Static hedging is suitable for strategies where the overall Delta is stable, such as a butterfly spread.
Glossar
Dynamic Hedging
Calibration ⎊ Dynamic hedging, within cryptocurrency and derivatives markets, represents a continuous rebalancing of a portfolio to maintain a desired risk exposure, typically delta neutrality for option positions.
Static Hedging
Technique ⎊ Static Hedging is a risk management technique where a derivative position is hedged using a fixed portfolio of other instruments, with the hedge composition remaining unchanged throughout the life of the derivative.