From what I have read, digital options are difficult to hedge near expiration because, around the strike, small moves in the underlying asset price can have very large effects on the value of option and the option delta. This means we would have to buy/sell large amounts of shares frequently to stay well hedged when using dynamic delta hedging.
It seems that near expiration of the option it is better to use a static call-spread hedge.
- When is the best time to switch from dynamic hedging to a call-spread hedge? For example one example question I am reading asks "would you build your call spread hedge the day prior to maturity"?
- Is there anyway to prove that it is more beneficial to use static hedging near expiry?