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How exactly is shifting the barrier to hedge delta implemented in case of barrier options. Is it just changing the barrier, if so, how does it hedge delta or is it making the barrier a range like a call spread.

Who exactly is the one who shifts barriers, is it the trader buying for example a down and in put option or the seller of that option?

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  • $\begingroup$ When you are delta hedging you pretend that the barrier is in a different place than it actually is, to avoid practical problems with hedging exactly at the true barrier exoticderivatives.wordpress.com/2009/02/19/… sp-finance.e-monsite.com/pages/… $\endgroup$ – Alex C May 30 '19 at 2:19
  • $\begingroup$ Suppose you are short a d.i.p. and are delta hedging. Barrier shifting is like saying "don't wait until the last moment, if S is coming down and approaching the barrier, take action now and start selling stock as if the barrier was hit and the put is already "in". Better a little too early than going through the barrier and missing your chance. $\endgroup$ – Alex C May 30 '19 at 2:51
  • $\begingroup$ Does it make sense? If S is coming down and you make a big sale for delta hedging purposes, the stock is going to tank further and you will get a lousy price which may well be below the barrier if you don't take this into account. So the true barrier is what is in the contract, but the shifted barrier is what you use for delta-hedge decision making (and pricing). On both counts it builds a safety buffer for you. $\endgroup$ – Alex C May 30 '19 at 13:34

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