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What are the pros and cons of delta re-hedging an option combination (straddle, strangle etc...) with options of the same underlying rather than with the underlying itself? I am having a hard time finding litterature on the subject.

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  • $\begingroup$ If you can hedge your position with an option cheaper than the underlying it feels more like arbitrage. $\endgroup$ – berkorbay Dec 5 '16 at 22:04
  • $\begingroup$ google 'static hedging of options' $\endgroup$ – Alex C Dec 5 '16 at 23:17
  • $\begingroup$ @ Alex C. Thanks for the info. There are quite some papers on the subject, mainly dedicated to exotic (barrier) options. $\endgroup$ – Nicolas Dec 7 '16 at 9:15
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On top of my head, there are two reasons. One is that the underlying may not be accessible, while you can buy/sell options on exchange or OTC. The other (more important) reason is your position on other greeks (gamma, vega, etc). With appropriate options you can adjust both your delta and other greeks.

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