Do you have a set of rules as to when you re-hedge your delta when you are short gamma? Do you never re-hedge and just pray the underlying comes back?
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yes
Generally at my firm portfolio managers try to stick to a set of rules i.e. cut short/long 100 futures to short/long 50 or something like that (when it gets to 100 cut it in half, long or short gamma), but that is tentative and some is based on feel for the underlying. Also, there are other factors, such as how you expect the overall position to perform to the upside/downside.
If it’s a vol play of course originally deal it delta neutral, but as for where to put your stops: Depends. I prefer to put them outside recent ranges (as opposed to limit orders when your long gamma where I’d prefer to put just inside recent ranges). In reality it’s not like the one short option will be all that you’re dealing with, and it’s going to be a case by case profile considering the gamma profile of the entire book of options.
Coming in on an old post here. Delta hedging more frequently will improve your Sharpe ratio, until transactions cost takes over, but you’ll have to increase leverage to keep the same return. This increases tail risk (ever hear of an options fund blowing up?). So you need to find the balance between tail risk and Sharpe ratio, that works for you. I suggest doing a study to find the best answers. If you don’t have the data you’re probably a retail investor so I suggest doing it twice a week or once a week. This makes it easier around your normal job.
Consider that delta comes first, thus you have to hedge your delta then going back to gamma you can adjust, eg gamma scalping.
If you are short gamma you are basically shorting the option, ie you have short put or something more complex like iron condors.
Gamma could also be rebalanced by buying and selling the underlying security to replicate payoff of the option (this can be L/S)
You can also delta re hedge basing your hedge on PV of future cf coming from the option
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