Delta hedging is a technique used to reduce the directional risk of an options position. Most research in this area focuses on hedging with Black-Scholes-Merton (BSM) implied volatility or those derived from advanced volatility models. Reference [1] compares the performance of delta hedging using implied volatility (IV) versus historical volatility (HV).
The author pointed out,
This study provides a comprehensive empirical comparison between implied volatility (IV) and historical volatility (HV) within the context of delta-neutral hedging strategies, specifically focusing on short-term options trading of the Nasdaq-100 ETF (QQQ). Through performance evaluation, sensitivity analysis, and hedging error measurement, the research concludes that IV-based hedging strategies offer superior performance in terms of stability, responsiveness, and risk management accuracy. IV-based strategies, due to their forward-looking nature and market-derived inputs, enable more accurate delta calculations and reduce rebalancing frequency, ultimately minimizing transaction costs and hedging mismatches. These characteristics make IV-based strategies particularly suitable for risk-averse investors and institutional trading environments that demand high precision and efficiency. In contrast, HV-based strategies, although simpler and easier to implement, suffer from lagging responsiveness during periods of market volatility, leading to larger hedging errors and higher portfolio return variance. Nevertheless, HV-based models may still hold value in stable or long-horizon scenarios where historical price trends are more informative.
In short, delta hedging with implied volatility offers more advantages compared with hedging using historical volatility.
This is an important line of research, though the paper has several limitations, notably the small sample size and the lack of clarity on the specific delta hedging strategy employed. Nonetheless, this direction is worth pursuing, particularly in establishing a delta band and determining the optimal hedging frequency.
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References
[1] Yimao Zhao, Implied Volatility vs. Historical Volatility: Evaluating the Effectiveness of Delta-Neutral Hedging Strategies, Proceedings of the 2025 5th International Conference on Enterprise Management and Economic Development (ICEMED 2025)
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