Hedging At The Close Versus Continuously

Delta hedging in theory means continuously adjusting a position so its exposure to the underlying stays at zero as prices move — but continuous rebalancing is a mathematical idealization, not something a real desk can or should actually do, because every rebalancing trade incurs a transaction cost. The practical question every hedging desk faces is how often to actually rebalance, and hedging at the close (once a day, after the market settles) versus hedging near-continuously throughout the day (many small adjustments) represents two ends of that spectrum.

Hedging only at the close is cheap: one trade a day means minimal transaction costs and minimal operational burden, but it leaves the position unhedged against intraday price swings, so the portfolio's value can drift meaningfully between closes, especially for options with high gamma near expiry or around volatile events. Hedging continuously (or as close to it as feasible) keeps the exposure tightly pinned near zero at all times, sharply reducing tracking error, but the constant stream of small trades racks up transaction costs and can itself move the market if positions are large, sometimes costing more in fees and slippage than the tracking error it eliminates.

The right frequency in practice depends on the position's gamma (how fast delta itself changes with price), the underlying's volatility, and the relative cost of trading versus the cost of being unhedged — a desk running large, low-gamma positions in a calm, liquid name can safely hedge infrequently, while a desk with concentrated short-dated options exposure in a volatile name typically needs to rebalance many times a day.