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

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.

Why Does High Volatility Necessitate More Frequent Delta Hedging?

What Is the Risk Associated with “Gamma Risk” in an Unhedged OTM Option Position?

How Does the Distance of an OTM Option from the Current Price Affect Its Gamma?

Why Is High Gamma Undesirable for a Portfolio Manager Who Wants a Stable Hedge?

What Is ‘Gamma Risk’ and How Does It Relate to Delta Hedging Frequency?

How Does the Gamma Greek Relate to the Frequency of Rebalancing a Delta Hedge?

Can Vega Be a More Significant Risk Factor than Delta for a Portfolio of Far OTM Options?

How Does Gamma Affect the Stability of the Hedge Ratio over Time?