I am looking for methods to select points in time when delta hedging plain vanilla European options under trading costs.
It is easy to come up with ad hoc ideas such as
- Time-based: for example at fixed time intervals.
- Price-based: hedge when the price has moved a more than a given percentage.
- Delta-based: hedge when the option delta has reached a given threshold.
How is the delta hedging frequency choosen in practice? Could you point out more sophisticated methods in the literature? Would Taleb's book on dynamic delta hedging be a good investment?
Edit: What I have found so far:
- Option Pricing and Replication with Transaction Costs, Leland, Journal of Finance, 1985.
He disscusses rehedging at ﬁxed regular intervals.
- Hedging of Option Portfolios and Options on Several Assets with Transaction Costs and Nonlinear Partial Diﬀerential Equations, V. Zakamouline, 2008.
Extends Leland's approach to other options, especially path-dependent options.