What Is the Main Drawback of Using Delta Alone for Hedging a Large Options Portfolio? ⎊ Path

What Is the Main Drawback of Using Delta Alone for Hedging a Large Options Portfolio?

The main drawback of using Delta alone for hedging is that it only accounts for the first-order risk of the underlying price movement. It ignores the second-order risk, which is the change in Delta itself, measured by Gamma.

A Delta-hedged portfolio is only momentarily neutral; as the underlying price moves, the Delta changes, and the hedge becomes imperfect. Ignoring Gamma means the trader must constantly rebalance (Gamma risk) and is exposed to losses from time decay (Theta risk) and volatility changes (Vega risk).

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