What Is the Difference between Static and Dynamic Delta Hedging?
Static delta hedging involves setting up a hedge once and holding it until expiration, often using a combination of options and the underlying asset that is initially delta-neutral. Dynamic delta hedging, conversely, requires continuously adjusting the position in the underlying asset (buying or selling) as the underlying price moves, to keep the overall portfolio delta-neutral.
Dynamic hedging is more precise but incurs higher transaction costs.
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 versus Dynamic
Definition ⎊ Static versus dynamic hedging refers to two distinct approaches for managing risk in derivatives portfolios.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Dynamic Delta
Dynamic ⎊ This concept captures the inherent time-varying nature of an option's delta as the underlying asset price evolves relative to the strike.