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Let us assume implied is higher than realized and I sell vol by delta hedging. If on some day, underlying gaps a lot, then i would get seriously hurt on daily PnL (even if i end up making money by holding the thing to maturity).Any idea what is a good way to protect against such extreme scenario? Thanks a lot.

you cant protect against - you coudl do some low risk "vol selling" strategies like buying butterflies. ... but otherwise as the say in fx markets "you got to put your c*ck in the custard".

That's a great expression, by the way, daveangel - I shall have to use it as soon as possible. Thank you.