One of the primary drawbacks of delta hedging is the necessity of constantly watching and adjusting the positions involved. Depending on the movement of the stock, the trader has to frequently buy and sell securities to avoid being under or over hedged.

Also, the number of transactions involved in delta hedging can become expensive since trading fees are incurred as adjustments are made to the position. It can be particularly expensive when the hedging is done with options, as these can lose time value, sometimes trading lower than the underlying stock has increased.

Time value is a measure of how much time is left before an option’s expiration whereby a trader can earn a profit. As time goes by and the expiration date draws near, the option loses time value since there’s less time remaining to make a profit. As a result, the time value of an option impacts the premium cost for that option since options with a lot of time value will typically have higher premiums than ones with little time value. As time goes by, the value of the option changes, which can result in the need for increased delta hedging to maintain a delta-neutral strategy.

Delta hedging can benefit traders when they anticipate a strong move in the underlying stock but run the risk of being over hedged if the stock doesn’t move as expected. If over hedged positions have to unwind, the trading costs increase.