1
$\begingroup$

I am not sure if this is actually done in practice as I'm not a derivatives trader, but I can only think of reducing the cost of the OTM option as a reason for delta hedging a deep OTM option, which is likely to be pricey/expensive.

Appreciate the help on this

$\endgroup$

closed as unclear what you're asking by Alex C, skoestlmeier, byouness, Attack68 Jul 5 at 21:30

Please clarify your specific problem or add additional details to highlight exactly what you need. As it's currently written, it’s hard to tell exactly what you're asking. See the How to Ask page for help clarifying this question. If this question can be reworded to fit the rules in the help center, please edit the question.

1
$\begingroup$

It really depends on the participant, but generally speaking, say in the FX markets, hedge funds would buy options to get exposure to volatility, not the underlying, so they delta hedge the option. The banks desks dealing the options don’t want exposure to the underlying either as these would be volatility desks whose expertise is vol so they would delta hedge as well. Hence there is an automatic match, and you will get better terms than if you were to hedge delta with a new counterparty or as a new trade.

The delta hedge will be updated as the option delta changes but you will have to start somewhere, though possibly many participants would have a strategy to hedge only material exposure. but then you won’t own just one option.

$\endgroup$
  • $\begingroup$ Does this mean then that the hedge funds and the banks generally don't want delta exposure? I would've thought hedge funds do use options to take directional bets on the underlying. $\endgroup$ – charm93 Jul 4 at 7:21
  • $\begingroup$ Yes hedge funds come in many flavours indeed, and there is a whole host of strategies. The volatility strategies would be delta hedging the underlying as the vol is more important $\endgroup$ – Magic is in the chain Jul 4 at 7:47
  • $\begingroup$ Right this makes sense. Just a few follow ups from me: are banks just trading vol now? And has this always been the case - or is vol trading just the flavour of the month currently? $\endgroup$ – charm93 Jul 4 at 8:00
  • $\begingroup$ It varies by bank but they would desire to be market makers, matching buyers and sellers, than taking positions. It could be chaotic because market conditions have been challenging recently so the individual banks behaviour changes, at times drastically. $\endgroup$ – Magic is in the chain Jul 4 at 11:40
  • $\begingroup$ hmm interesting $\endgroup$ – charm93 Jul 4 at 13:22

Not the answer you're looking for? Browse other questions tagged or ask your own question.