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Under what circumstances would one want to delta hedge a straddle option? This link

explains:

 Both straddles and strangles can be used with delta hedging 
when an investor expects high volatility around the strike price
(where gamma and returns from delta-hedging  will be greatest).

How am I gaining by hedging the delta, it is not clear from this explanation.

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  • $\begingroup$ Your question is not clear. Are you asking about a zero delta exposure at contract initiation or during the life time of the position? $\endgroup$ – Matt Feb 20 '15 at 3:40
  • $\begingroup$ at contract initiation, it will already be close to delta neutral, right? call=+0.5, put = -0.5. I was asking why we need to keep delta hedging once the underlying start to move. $\endgroup$ – Victor123 Feb 20 '15 at 15:18
  • $\begingroup$ A straddle at initiation does not have to be exactly delta neutral, not even an ATM or ATMF one. To make it delta neutral, it depends on the exact underlying we talk about and hence how you set the strike of the straddle. You can trade the gamma in the straddle and buy and sell the underlying during the life-time of the option. $\endgroup$ – Matt Feb 21 '15 at 10:15
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You delta hedge if don't have an opinion of whether the stock will go up or down but think that realized volatility will be substantially different from implied volatility. If you don't delta hedge without having a view on the direction of the stock you are taking unnecessary risk.

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  • $\begingroup$ Thanks. The straddle position is market neutral. let us say underlying moves past the strike on the upside. Now my position is positive delta because the put is now out of money(0 delta) and call is in money (1 delta). At this stage, I would just take my profit. Where is the need for delta hedging? $\endgroup$ – Victor123 Feb 20 '15 at 2:57
  • $\begingroup$ That is not entirely accurate. Even if you do not "have a view on the direction of the underlying" it can still be advantageous to not delta hedge. The real question is whether the risk outweighs the cost of the hedge or not. $\endgroup$ – Matt Feb 20 '15 at 3:42
  • $\begingroup$ Thanks. what is the risk...in the scenario that is described in the comment? I am selling when the price moves beyond one of the strikes sufficiently. in a straddle, my max risk is already limited, so what am i hedging? $\endgroup$ – Victor123 Feb 20 '15 at 15:17
  • $\begingroup$ your risk is your time decay, for example. It is a real and relatively estimable risk but nonetheless a risk. Too frequent hedges can become costly and can make that exercise costlier than the benefit it pursues. $\endgroup$ – Matt Feb 21 '15 at 8:20
  • $\begingroup$ @Victor123 I agree this is still not clear $\endgroup$ – Permian May 7 '18 at 10:43

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