Take the 2-minute tour ×
Quantitative Finance Stack Exchange is a question and answer site for finance professionals and academics. It's 100% free, no registration required.

Can someone explain to me why the delta-hedging of ATM options near expiry is difficult?

share|improve this question
    
Why is this closed? There is a scientific explanation to this question, as the delta of ATM options close to expiry becomes binary. –  RockScience Apr 3 at 8:13
add comment

closed as off topic by Jase, olaker Nov 4 '12 at 13:53

Questions on Quantitative Finance Stack Exchange are expected to relate to quantitative finance within the scope defined by the community. Consider editing the question or leaving comments for improvement if you believe the question can be reworded to fit within the scope. Read more about reopening questions here.If this question can be reworded to fit the rules in the help center, please edit the question.

1 Answer

up vote 4 down vote accepted

This is usually called Pin Risk. It's difficult because there is a high degree of uncertainty regarding the whether the options you sold are exercised or not. If you don't hedge, your short options could be exercised and you are left with risky net short position in the underlying. If you hedge and your short options are not exercised, then you have a long position in underlying after expiry. Alternatively, you can partially hedge. However, in any case, you are potentially exposed to risk of adverse underlying movement.

share|improve this answer
add comment

Not the answer you're looking for? Browse other questions tagged or ask your own question.