Why Off-Term Options Can Be Harder to Delta Hedge

Summary

The document asks why an over-the-counter option can be harder to hedge when its expiry does not align with a major listed contract’s expiry, even if both options reference the same underlying futures contract. The example contrasts an OTC gold option expiring in early February with a listed March COMEX gold option on April futures. It asks whether the OTC option can simply be delta hedged in the usual way until expiry, or whether Black–Scholes assumptions undermine the price relationship when the option expires earlier.

The quoted response distinguishes off-term expiries from expiries aligned with listed contracts and says desks charge a higher margin or spread for off-term products because they are harder to hedge. However, the document supplies no detailed explanation of the hedge mechanics, model assumptions, or evidence for that pricing practice. It frames the practical issue but leaves open what makes the hedge harder, how basis or timing risk enters, and how a trader might measure or manage those risks.

Key ideas

• An option expiring between major listed expiries may be considered off-term.
• The quoted response says desks apply a higher margin or spread to off-term products because they are harder to hedge.
• The example compares an OTC option on April gold futures with a listed option on the same futures contract.
• The document asks whether ordinary delta hedging remains appropriate but does not explain the relevant hedge risks or model limitations.

Tags

# Delta hedging an option with earlier expiry


# Delta hedging an option with earlier expiry












The answer here states:

> For instance a volatility product that would expire at 10:42 am on a random day would be off term. One that expires at the same time than a major listed contract would be term vol. Your desk will quote off term products with a higher margin/spread because they are harder to hedge.

Consider say a March COMEX Gold Option (which has an April COMEX Gold Futures underlying), and say we are trying to delta hedge an OTC Gold Option over an April COMEX Gold futures contract expiring at the start of February (so 'off term' using the above terminology).

Why would it be more difficult to hedge the OTC Gold Option compared to the on exchange March COMEX Gold Option (they both have the same underlying). Could you just delta hedge the OTC option as per normal up until its expiry, or is there some assumption in the Black Scholes model that invalidates the price relationship between the underlying and an option that expires earlier?

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