Expiry-Day Delta Hedging in an Illiquid Stock

Summary

The document poses an expiry-day hedging problem for a slightly out-of-the-money option on an illiquid equity. It highlights a practical execution concern: buying the underlying to offset delta could move the market, potentially changing the stock price enough to affect whether the option finishes in the money.

No hedge sizing rule, execution method, or resolution is provided. The prompt identifies a tension between reducing directional exposure and the market impact of trading the hedge, but gives no details about the option position, liquidity, costs, or risk tolerance. It is therefore a useful statement of an execution and hedging question rather than evidence for a particular expiry-day strategy.

Key ideas

• The scenario concerns delta hedging a slightly out-of-the-money option on an illiquid stock at expiry.
• Trading the underlying to hedge may move the market and affect the option's moneyness.
• The document does not prescribe a hedge size, execution tactic, or alternative instrument.

Tags

# How should one hedge option positions on the date of expiry?


# How should one hedge option positions on the date of expiry?












Let's say we are looking at a non-liquid equity ticker and a slightly OOM option on it. The problem is that if we buy delta to hedge it, it could move the underlying market and push the option to be ITM.

How do we delta hedge this position on the date of expiry?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.