Discrete hedging
Definition · Level 5 · Greeks & volatility
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Hedging in steps instead of continuously. It leaves noise in the profit and loss even when realized volatility equals implied volatility. The noise shrinks with the square root of the number of hedges, while costs grow with it.
Example
Daily hedging noise $45; four times a day $22.
Where Tradecraft teaches it
Level 5 · Greeks & volatility, in the lesson “Discrete hedging: noise, trades and bands”: Theory hedges continuously. Real hedging happens in steps, and the steps leave noise.
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