Delta hedging and volatility of underlying

[Anonymous]

Hey guys. One of the questions in the list is:

Which of the following is not a relevant consideration for a trader desirous of delta hedging his or her options portfolio?

Of the 4 options, I selected the “correct” answer of “Volatility of the underlying” – but not 100% convinced how it is correct. The solution is not too clear to me in terms of flushing out the details.

The delta is dV / dS, where V is option value, S is the underlying value, and d is the partial derivative.

The calculated delta value used in the hedging is calculated at a particular point in the curve. This point may change “more easily” if the volatility is higher. i.e. higher volatility may mean that the dV / dS changes much more dramatically – as the derivative is evaluated at a new point S on the dV / dS curve.

In this sense, why is “volatility of the underlying” not a concern? I agree that of the 4 options, this may be the “weakest”, but I don’t think it’s as irrelevant as the “color of my coffee mug” to the delta hedging process.

Thanks.

[Author]

Posts