Is THIS the reason to hedge on options?

[Hiperfly]

Hello all, I'm new to options and I just started to study them by reading Paul Wilmott's Book "Paul Wilmott introduces to Quantitative Finance".

My question is:

We know that the value of an options depends on the value of the underlying asset, the volatility, etc. So, is hedging the way that the value of the option stops depending on the value of the underlying asset, so we have less variables to care about?

For example, if our two only variables were price of the asset and volatility (to make it simple) we would hedge the option with the delta to depend just on the implied volatility and have a more predictable future, right?

Thanks all

 

[Amalgam]

The idea is that you can replicate an option's payoff with a portfolio of the underlying via continuous hedging. So if an option is overvalued you sell the option, replicate it in the underlying and your P/L is the difference of the price you sold the option for minus the cost imposed via the hedge(the option's true cost).

 

[SIUYA]

Think about it this way --- Options are about risk transferal.

if you hedge something often you are often simply transfering risk elsewhere or substituting one set of risks for another.

In your example - you hedge an options delta and your question is - has the future become more predictable?

You need to remember you have only hedged it at that point in time. The underlying will still move, time will still pass/decay and the delta will change.
By hedging the delta with the underlying you have merely created a synthetic put.

The hedge has no effect on the predictability of the future, but I would argue that you have substituted your delta directional risk into one of increased volatility risk. (just to add to the confusion )