🛡️ Hedge Configuration in TOM

The hedge section defines how your strategy automatically offsets risk exposure — typically delta — during a backtest. 

While most TOM strategies focus on option legs, hedging introduces a second layer of control: systematic adjustment of directional risk using the underlyings. 

🧭 What the Hedge Section Does

Hedging enables TOM to open and close positions (underlying futures or stocks) dynamically, thereby maintaining a target delta or other exposure metric.
This can simulate the actions of a trader or algorithm that continuously manages risk rather than holding naked option exposure.

If hedge is omitted or set to "no", no hedge logic is applied, and your structures run unhedged.

⚙️ Example

Here’s a minimal TOM hedge block:

"hedge": {
  "type": "delta",
  "freq": "weekly",
  "expiry_dte_min": 1,
  "expiry_nearest": "1",
  "source": "underlying"
}

This configuration creates a delta-based hedge that rebalances weekly, using the underlying as the hedging instrument.

🧩 Hedge Parameters

type

Defines what risk dimension the hedge targets.
Currently supported values:

freq

Determines how often the hedge is recalculated and executed.

expiry_dte_min and expiry_nearest

Used only if the hedge instrument is a future, not an underlying.

They follow the same logic as leg selection:

• expiry_dte_min: minimum DTE for selecting the hedge future

• expiry_nearest: which qualifying expiry to use ("1" = nearest)

source

Specifies what instrument the hedge is executed on.

🧠 How Hedge Logic Works

1. Compute exposure:
   After each recalculation period (freq), the engine evaluates the total delta (or other target) of the active legs.

2. Determine hedge need:
   If the portfolio delta exceeds the neutral threshold, TOM opens or adjusts a hedge position in the specified source.

3. Rebalance:
   On the next hedge event, TOM closes or modifies hedge exposure to realign with the target.

4. Expiration management:
   If the hedge uses an option instrument, the engine automatically rolls it according to expiry_dte_min and expiry_nearest.

🧾 Full Example: Hedged Structure

{
  "strategy_id": "Delta-Hedged Short Put",
  "signals": "no",
  "initial_equity": 100000,
  "equity_type": "compounding",
  "from_date": "2015-01-01",
  "to_date": "2025-01-01",
  "option_expiry_type": "Standard + Serial",
  "hedge": {
    "type": "delta",
    "freq": "weekly",
    "expiry_dte_min": 1,
    "expiry_nearest": "1",
    "source": "underlying"
  },
  "legs": [
    {
      "id": "Short Put",
      "underlying_id": "IND.ES",
      "options_family_id": "IND.ES",
      "type": "p",
      "weight_type": "notional",
      "weight": -1,
      "expiry_dte_min": 30,
      "expiry_nearest": "1",
      "strike_type": "delta",
      "strike_value": 0.25,
      "period": "month",
      "period_contract": "All"
    }
  ]
}