On hedging, noise and risk reduction

  • ,The inability to hedge perfectly continuously impacts your trading by introducing random risk. This risk decreases if you hedge more frequently, but only as fast as the square root. Therefore, if you want to halve your risk, you have to hedge four times as often.
  • Noise from hedging a one-year option on a daily basis instead of continuously is about the same as one volatility point.
    • If you make one volatility point in expected profit and the standard deviation of your profit is one volatility point, then your Sharpe ratio is about one.
    • the risk from not hedging continuously can be diversified away