Short-Horizon Volatility Forecasts in Delta Hedging

Summary

The document asks whether forecasts of realized volatility over a short interval can improve delta hedging or gamma scalping for an option with a longer remaining life. It starts from the familiar intuition that hedged option profit and loss is related to realized volatility relative to implied volatility, with gamma affecting the exposure. The questioner interprets implied volatility as the price paid at inception for volatility over the option’s full life and wonders how a shorter-term forecast could help.

No answer, calculation, or empirical result is included. The question highlights the distinction between an option’s lifetime pricing and the volatility realized during successive hedge intervals, but it does not explain how to combine those horizons or account for changing gamma and implied volatility. It is therefore a conceptual prompt rather than a demonstrated hedging method, and it leaves trading costs and forecast accuracy unaddressed.

Key ideas

• Delta-hedged option profit and loss is framed as depending on realized volatility relative to implied volatility, weighted by gamma.
• The document questions how short-term realized-volatility forecasts relate to options with longer maturities.
• It treats implied volatility at inception as a measure associated with the option’s full life.
• No derivation or evidence is provided to show whether short-horizon forecasts improve hedging results.

Tags

# Can prediction of realized volatility for next day improve delta hedging (gamma scalping)?


# Can prediction of realized volatility for next day improve delta hedging (gamma scalping)?












Im quite confused. As I understand from standard delta PNL of option + underlying position, pnl is equals to difference between realized and implied vol weighted by gamma.

However, as I understood, implied in that formula - is basically what you paid (got paid) at the start of the options life, meaning that you basically bet on realized vol on the whole life of an option.

How can then realized prediction for shorter intervals (like 1-7 days) help then in delta hedging pnl for an option of 1-2 month for example?

Thanks!

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