Technical question regarding exiting vs hedging... Scenario A: Started with 100 Calls and sold off the excess delta as the value of the options increased essentially maintaining the original delta amount. Scenario B: Started with 100 Calls and offset the delta increase buying puts. Lets ignore commission costs and the added complexity of scenario B for the time being. Comparing the above two scenarios in theory as I see it in a lot of ways your basically doing the same thing in maintaining the original delta value, but just going about it two different ways. My question is ...with scenario A your continually decreasing your position size. Where as with scenario B your position size stays the same, but your effectively accomplishing the same end result by purchasing offsetting puts. I can't seem to shake the feeling that in the event of a continual increase in option value there is some benefit to Scenario B's maintaining of the original position size that I am not fully seeing. Am I missing something or am I looking at two different paths to get to the same destination ?
You've added gamma and vega to your trade. If the stock were to collapse or continue its run, you may do better. If it just sits you will do worse.
Assuming you are maintaining the same initial delta in both cases. scenario A - you are only really maintaining your delta by substituting your calls for synthetic puts. Your option position does not change, but your payoff scenarios do. scenario B - you are only really maintaining your delta but you are increasing your position size through the purchase of more options, so you are adding rather than substituting more risks. So yes - there is benefit to scenario B (this is the reward for the added risk) - IF there is continued volatility to trade the gamma and it increases, there is a black swan event (ideal scenario) or the uptrend/downtrend continues.....because scenario B is like pyramiding. Remember options have more than just delta risk..... there are also risk components of interest rates, yield, volatility. Dont confuse position size, risk and exposure.