Anyone know what the point of dynamic neutral hedging is? Long the stock and short the calls…but why? To lock in the value of the stock without selling? I can’t see any other reason…other than run up the commission bill by rebalancing the portfolio ;>)
Immunize the risk of the positions without realizing a tax bill would be one.
hedging is hedging… the reasons are obvious to cover you position for a period of time
mmmm no I disagree… neutral hedging is NOT the same as hedging… long the stock and long a put option…makes sense to me. Limit downside risk and only lose the cost of the put if the stock goes up. Hedge against downside risk and make money if the stock goes up. long the stock and short the call option (neutral hedge)…doesn’t make sense to me. Lock in the price only. No gains, no losses…and no tax bill as stated above. So no, hedging isn’t hedging lol!
Think of it for instance from the persepective of a market maker. He/she holds a very large inventory of positions, but really has desire to be long or short the stock. so say on a friday, the dealer wants to have zero exposure to delta, he will completely hedge. I understand your questions though, no individual investor would set up a delta neutral hedge except in rare occasions. Another reason is to hedge delta(direction) but then set up trades that are looking to gain via changes in volatility.
I look at it maybe in a different way so let’s say you have a position of short on calls of X security you think you might be in trouble but still don’t want to exit your position. so you buy the required number of stocks and cover your position or as lance said you could do it the other way but for short periods of time… i might be wrong in my understanding though
ahhh now that’s starting to make sense!