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Situation: Sold OTM call while long the underlying. Stock did not tank, it went up too much breaching the breakeven point (strike price+premium).

If I sell 1 lot of call options and I am being long the underlying, do I still need to do delta hedging? If the underlying moves too much on the upside, at expiry, I can simply sell the underlying and pay the difference once I am assigned. This will offset the loss incurred but I still get to keep the premium. Will delta hedging help me in anyway if I hold till expiry?

Suggestions and comments are truly appreciated. Thanks in advance!!

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The purpose of delta hedging is to manage your risk. You sold a covered call so your risk is to the downside.

If you were concerned about downside risk, at the outset you could have done a long stock collar instead of a covered call. The collar would not be delta neutral but it would be a step in that direction and the amount of hedging (negative delta) would depend on the distance to the strikes on each side.

FWIW, collared stock is synthetically equivalent to a vertical spread so you'd add the collar if legging in (you already own the stock) and use a vertical if opening a new position. Fewer legs saves you B/A slippage, fees and if still paying them, commissions.

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  • $\begingroup$ Hi Bob, thanks for answering. Now let's say I placed a limit short order on futures with same number of lots before the breakeven price to limit my downside. Does delta hedging still has any importance? $\endgroup$ – rockav Aug 21 at 17:14
  • $\begingroup$ Why are you placing a limit short order on futures if you are long the stock? Delta hedging has importance if you want to be hedged. Just my retail opinion but if you're doing basic strategies like selling short puts to acquire stock or selling covered calls to sell a long position at a target price or any other plain vanilla retail strategy then delta neutral hedging isn't relevant. Nothing is required. OTOH, if you desire precise hedging, it is. $\endgroup$ – Bob Baerker Aug 21 at 17:29
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Delta hedging is about managing risk. Assuming you were delta hedged at the inception of your position, you no longer would be with a large move in the underlying (ie, the magnitude of your sensitivity to the underlying via the call is different than it is based on your position in the underlying). You don't have to do anything, after the move you have a non-zero exposure to the underlying. If that matters to you, you could buy/sell shares to get back to delta hedged, and then would again with another large move. You're only roughly delta neutral for small moves in the underlying.

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