Advanced Hedging Techniques

1. What Makes Hedging “Advanced”?

Basic hedging uses straightforward tools like:

Buying puts to protect long positions

Selling futures against a portfolio

Using simple covered calls

Advanced hedging goes several steps deeper, using:

Multi-leg derivatives

Volatility-based adjustments

Dynamic delta/gamma balancing

Cross-asset risk offsets

Market-structure aligned protection

Time decay and IV crush advantage

Partial, rolling, and ratio hedging

The idea is simple: Instead of eliminating risk completely, advanced hedging balances risk and return to improve profitability over time.

2. Dynamic Delta Hedging

One of the core concepts in advanced hedging is delta hedging, primarily used by option writers, institutions, and algorithmic traders.

How it works:

Every option has delta, which measures how much the option’s price moves relative to the underlying.

A trader continuously adjusts futures or stock positions to keep the overall delta close to zero.

For example:

You sell a call option with delta +0.4

To hedge, you short 40 shares (or equivalent futures)

As the market moves, delta changes, so you rebalance (buy/short) to stay delta-neutral.

Why it’s advanced:

Requires constant monitoring

Involves forecasting volatility shifts

Needs strong understanding of Greeks

Delta hedging is the backbone of market-neutral strategies, used heavily by HFTs, prop desks, and market makers.

3. Gamma Scalping

Gamma scalping is an advanced extension of delta hedging.

Key idea:

When you buy options, you gain positive gamma.

Positive gamma lets you profit from intraday price swings, provided you adjust delta actively.

Example:

You buy a straddle (long gamma).

When market moves up, you sell futures at higher price.

When market dips, you buy futures at lower price.

Even if the option decays, this scalping around volatility can outperform theta loss.

Why advanced?

Requires rapid execution and discipline

Depends on volatility forecasts and market structure

Works best in high VIX environments

Many algorithmic strategies use gamma scalping to capture volatility spikes.

4. Ratio Hedging

Instead of a 1:1 hedge, advanced traders use ratio hedging to reduce cost and maximize coverage efficiency.

Example

You hold:

100 shares of a stock
Instead of buying 1 put, you buy:

0.75 puts (3/4th hedge) to reduce premium cost

Or in F&O:

You hedge an equity portfolio with Nifty futures at 0.7 ratio
This covers systemic risk while leaving room for upside.

Why it’s useful:

Cheaper than full hedging

Maintains bullish bias

Helps outperform in rising markets

Professional hedgers rarely hedge 100%—they target optimal hedge ratio, statistically between 0.5 to 0.8.

5. Calendar (Time-Based) Hedging

This technique uses different expiry cycles to hedge positions.

Example

Long monthly futures

Short weekly futures

Or long far-month options and short near-month options

This helps exploit:

Time decay differences

Volatility mispricing

Event-driven risk (Budget, RBI policy, earnings)

Effectiveness:

Calendar hedging allows traders to create income from theta while keeping long-term directional protection.

6. Volatility Hedging (Vega Hedging)

For traders dealing with events like:

Elections

Monetary policy

Global uncertainty

Result season

Volatility hedging becomes essential.

How Vega hedging works:

You neutralize exposure to changes in implied volatility.

Example:

Short straddle = short vega

To hedge, you buy options with similar vega but different strikes or expiries

Or use VIX futures to counter volatility spikes

Why advanced?

Vega moves are unpredictable and can explode during sudden news. Vega hedging is crucial for premium sellers.

7. Cross-Asset Hedging

Institutions and advanced traders hedge positions using different but correlated assets.

Examples:

Hedge HDFC Bank equity risk using Bank Nifty futures

Hedge crude oil exposure with USDINR (as crude affects currency)

Hedge Nifty positions with SGX/GIFT Nifty

Hedge IT stocks using Nasdaq futures

Hedge gold with USD or 10-year bond yields

Why it works:

Market correlations are powerful, especially in globalized trading.

Cross-asset hedging reduces:

Volatility shock

Black swan impact

Sectoral divergence

8. Protective Options Structures

Instead of buying simple puts, advanced traders use multi-leg structures to reduce cost and improve payoff.

a) Collar Hedge

Long stock

Long put

Short call

Reduces cost of put = low-cost downside protection.

b) Put Spread Hedge

Buy ATM put

Sell OTM put

Lower cost than outright put, ideal for event hedging.

c) Synthetic Futures

Long call + short put
or

Short call + long put

Used to replicate or hedge futures efficiently.

d) Risk Reversal

Sell OTM call

Buy OTM put

Used extensively by institutions during bearish phases.

These structures protect against downside while keeping cost manageable.

9. Tail-Risk Hedging

Tail-risk hedging protects against rare, unexpected, but massive crashes (e.g., COVID crash, 2008, sudden geopolitical tension).

Popular tools:

Deep OTM puts

VIX futures / options

Long strangles on low IV days

Black Swan hedges (long gamma long vega)

Though expensive, tail hedging saves portfolios during extreme volatility.

10. AI-Driven Hedging Models

Modern hedging integrates machine learning for:

Volatility prediction

Correlation breakdown detection

Regime identification

Market-structure shifts

Auto delta/gamma adjustments

AI-based hedging can:

Reduce reaction time

Improve precision

Adjust dynamically to liquidity

Detect early signs of volatility expansion

This is used heavily by institutional options desks and large quant funds.

11. Market-Structure Based Hedging

Advanced traders hedge based on:

Liquidity zones

POC levels

Volume profile

VWAP zones

Break of structure (BoS)

Premium/discount zones

For example:

Hedging when price approaches a high-volume node

Hedging intraday longs near previous day high liquidity traps

Scaling hedges based on market structure weakness

This creates context-based hedging, not blind hedging.

12. Rolling Hedges

Instead of static positions, advanced traders roll hedges:

To next strike

Next expiry

Different ratio

Different structure

Rolling helps:

Lock profits on hedges

Reduce premium cost

Maintain continuous risk protection

Adjust to trend changes

Example:

Your protective put becomes profitable after a fall
→ Roll down and capture gains while maintaining coverage.

Conclusion

Advanced hedging is not about eliminating risk—it’s about controlling it intelligently. From delta-gamma management to cross-asset protection, option structures to AI-driven adjustments, the goal is simple: survive volatility, protect capital, and ensure consistent profitability.