How should we interpet "you thinks that the realized vol is going to be lower". Is some oracle disclosing the future to you? Or is it a worry you want to eliminate?
I am a little miffed by your question. Trading IS about taking a view or a conviction about the future. Not just trading, even hard science is about believing you can find some law which will hold in the future. There is no guarantee that tomorrow Einstein's theory of gravitation (general relativity) or quantum mechanics will still hold. We just believe. There is no oracle. So I am not quite sure the question is about. Now, as for the route by which my "thinking" or view come, there are many. It could be my algorithmic model (maybe you can call it the oracle), or some breaking news or just my hunch I have honed over the years, that tells me that the future vol will be lower than the present implied vol.
You can replicate an option (long or short, one you don't necessarily own) with delta hedging... which is what you do when you hedge your option.
That seems to be just what I said in my last post "
It seems there is nothing special to be done aside from delta hedging. In other words, what else do you do besides delta hedging?"
replicate the negative option you have in order to overall stabilise the P&Ls swings from the one you own
I think you are saying the same thing as my comment below the formula I gave for discrete hedging. Quote: "
When we take expectation at time 0, the second stochastic integral disappears. In fact it disappears whatever the delta hedging we put on at the beginning. The best hedging ratio is to minimize the variance of that second integral." Your stabilization is the same as my variance minimization. Agree?
There is no way around having to take the loss of having bough a too expensive option at too high implied. Your expected loss will come towards you as you get closed to expiration -or faster if implied adjusts to more realistic levels-. Hedging can stabilise your expected loss but you can't change the mean.
I think you are confirming my surmise "
You are expected to loose money so long as you keep holding the same amount of the call." And it gels with my previous assertion under my discrete hedging P&L formula "
When we take expectation at time 0, the second stochastic integral disappears. In fact it disappears whatever the hedging delta we put on at the beginning." Agree?