moontower
Hedging on Implied Delta
What's My Bias?
When implied ≠ realized, your model-computed delta over- or under-hedges you. That bias has a regime where it's a feature, not a bug.
Core mechanic
Higher vol → all deltas compress toward .50
(ITM lighter · OTM heavier)
OTM Options
higher vol → heavier delta
| If you hedge on implied and… |
Your Δ |
Prefers |
Why |
| Implied > Realized |
Heavy |
Chop |
Over-hedging scalps mean-reversion — more shares traded than "true" delta warrants |
| Implied < Realized |
Light |
Trend |
Under-hedging lets gamma run — fewer offsetting shares, profitable if direction persists |
ITM Options
higher vol → lighter delta
| If you hedge on implied and… |
Your Δ |
Prefers |
Why |
| Implied > Realized |
Light |
Trend |
Under-hedging lets gamma run — fewer shares against a deep option, profitable if direction persists |
| Implied < Realized |
Heavy |
Chop |
Over-hedging scalps mean-reversion — more shares against a deep option, profitable if stock reverses |
Heavy Δ → Chop
Over-hedging is profitable when the stock mean-reverts. You're scalping more aggressively than warranted.
Light Δ → Trend
Under-hedging is profitable when the stock trends. Less offset lets gamma profits compound.
Why "trend" is already in the framework
Daily close-to-close realized vol understates trending markets. Each daily return is small and same-signed — low RV. Sample less often (weekly) and the drift compounds — high RV. So "Implied > Realized" in a trending stock is partly a measurement artifact. The cheatsheet captures this: "Light Δ → prefers Trend" is exactly where daily RV misleads you.