Why Is Delta Hedging More Challenging for OTM Options Compared to ATM Options?

Delta hedging OTM options is challenging due to their low Delta and high Gamma-to-Delta ratio. A low Delta means a large position in the underlying is needed to hedge, which can be capital intensive.

More critically, OTM options have Gamma that changes rapidly as they move towards ATM, requiring frequent re-hedging. This constant need to adjust the hedge due to changing Delta makes it administratively complex and costly.