hedging is for gardeners

Let’s start with this YouTube/Podcast episode where Erik and I discuss hedging.

📺Delta Hedging Cost Benefit Analysis | The Options Trench

• What hedging is: reducing or isolating risks you do not want, to maximize exposure to ones you intend to get paid on
• The difference between direct hedges and correlated, indirect hedges with basis risk.
• Why every hedge has a cost, including premiums, bid-ask spreads, commissions, slippage, and opportunity cost.
• Why you will almost always have “ragrets”: if the hedge works, you wish you hedged more; if it does not, you regret paying for it.
• How protective puts, put spreads, collars, and covered calls change risk and cost.
• The tradeoff between cheaper short-dated protection and more expensive long-dated protection.
• How rising stock prices can make an old put hedge less effective by increasing your unprotected “deductible.”
• Two ways to manage hedges: rebalance on a fixed schedule or act when risk crosses a predetermined band.
• How hedges can preserve capital and buying power during market stress, when the best opportunities may appear.
• An introduction to delta hedging, active delta management, gamma scalping, and how these concepts apply to options strategies.

I noticed this tweet a few weeks ago and it reminded me an example of my training days back in my AMEX days with SIG.

You had full discretion to delta hedge against the option orders you’d do. But as you learn in the podcast, hedging is a cost. You don’t want to hedge if the risk is tolerable. “Hedging is for gardeners.”

SIG had a big balance sheet and very tolerant of letting deltas ride so the bias to hedge was to hedge only if you thought the option order was “smart”. For example, if a cust has a pattern of selling puts right before the stock price rips higher, you want to hedge aggressively when you buy the puts. In fact, you might want to “overhedge.” Instead of buying the amount of shares prescribed by the delta you hedge “1-to-1” or “1 up” meaning you buy 100 deltas worth, effectively turning the put into synthetic calls.

Fast forward to 2026:

The screenshot in the tweet is an option flow service announcing the someone bought the 60/70 put spread which is a bearish statement. Bulltard says he was the one who traded 3000 out of 8000 of these spreads and that he was rolling a short up from the 60 strike to the 70 strike.

This is conceptually similar to our point above about how rising stock prices can make an old put hedge less effective by increasing your unprotected “deductible.” You need to roll the position if your exposure strays sufficiently far from the one you intend to have on. In this case, jbulltard who wants to be short puts wants to be shorter more substantial puts than the 60 strike so he “rolled up” either to re-strike his delta or vol position (or both).

In training, we discussed a scenario which the tweet reminded me of, but in the opposite direction. The question posed by an instructor was:

Imagine a customer coming in to roll his or her put down. They will need to sell a put spread as they close the higher strike and buy the lower one. If you are a market-maker providing liquidity to the seller by buying the put spread to hedge, you buy the stock.

Hold it right there.

If this customer is taking a profit by selling the higher strike put and opening a long position in the lower strike, they are actually still bearish. This customer that has been correct is not covering their short. Technically, they are less short than they were before rolling, but the roll is to get more option firepower in the next leg down. Think of the intent.

As a market-maker, you don’t want to hedge when you buy this put spread. The customer has given you the position you want. You’re short deltas, betting on the same side as the smart customer!

The option flow service above seems like it correctly identified that the trade was a put spread, but it presented the trade as someone buying the put spread. Technically, someone did buy it since there’s a buyer and seller on every trade, but the presumption when you say someone bought the spread is that a customer or “paper” bought the spread, not the market-maker.