Delta-gamma neutral hedging?
DarkProtoman
won't lose money, but, conversely, you won't gain money either.
I buy a XYZ 50 call option w/ a delta of 20, and short 20 to hedge
it. The call's delta rises to 30 next day, so I short an additional 10
shares to keep it hedged. Day after that, the call's delta falls to
10, so I cover 20 shares to keep the call hedged.
What's the purpose of this? Please explain this to me.
arthur
ordinary folks would simply go broke paying the bid ask spread.
a
On 12 Mar 2007 20:07:09 -0700, "DarkProtoman" <Protom...@gmail.com>
wrote:
Dr Tormento
news:1173753947.6...@t69g2000cwt.googlegroups.com:
It pays the tuition bills for your broker's kid.
DarkProtoman
Give me a USABLE answer for why gamma scalping is used.
BlueTrin
Arthur did ...
arthur
gamma decreases and delta movement falls when moving away from ATM
who's the con artist?
On 12 Mar 2007 20:07:09 -0700, "DarkProtoman" <Protom...@gmail.com>
wrote:
>What's the purpose of delta-gamma neutral hedging? I understand you
arthur
underlying asset to remain delta neutral.
On 12 Mar 2007 20:07:09 -0700, "DarkProtoman" <Protom...@gmail.com>
wrote:
>What's the purpose of delta-gamma neutral hedging? I understand you
arthur
Puts and stock.
On Wed, 14 Mar 2007 18:34:20 -0800, arthur <trash.a...@xoxy.net>
wrote:
Bill Pringlemeir
>>> What's the purpose of delta-gamma neutral hedging? I understand
>>> you won't lose money, but, conversely, you won't gain money
>>> either.
>>> I buy a XYZ 50 call option w/ a delta of 20, and short 20 to hedge
>>> it. The call's delta rises to 30 next day, so I short an
>>> additional 10 shares to keep it hedged. Day after that, the call's
>>> delta falls to 10, so I cover 20 shares to keep the call hedged.
> Give me a USABLE answer for why gamma scalping is used.
Flip the case you cited. Sell naked XYZ 50 call options and buy a
similar quantity to cover the 20 delta. As the stock rise, you must
purchase additional shares. In this case, you believe that the
volatility of XYZ is being judged too high by the market.
The opposite scenario doesn't make sense for delta hedging. If the
market is underestimating volatility, then you don't want to delta
hedge with the stocks.
I think there are two confusing concepts. One is delta hedging, where
you replicate the option by buying and selling the underlying. This
is a way to replicate options.
The second is using the "delta" and "gamma" of the options. Ie, the
derivative and double derivative of price. The object is to keep the
position so that these values "sum" to zero. The overall objectives
of these positions is to trade "vega" or volatility. You can usually
take positions on each side.
fwiw,
Bill Pringlemeir.
--
Life, don't talk to me about life. - Marvin the robot
arthur
Interesting. Assuming selling IV, the odds favor the bear which would
mean selling the underlying and Calls which certainly wouldn't be
delta neutral. The other is the CC which might be delta neutral but
risk the underlying. Got an example?
a
On 16 Mar 2007 12:44:24 -0500, Bill Pringlemeir
Bill Pringlemeir
> Bill Interesting. Assuming selling IV, the odds favor the bear
> which would mean selling the underlying and Calls which certainly
> wouldn't be delta neutral. The other is the CC which might be delta
> neutral but risk the underlying. Got an example?
Well, I will start off by being more specific about the example. With
the XYZ 50 call, you will have a delta at the current underlying. For
example, with a delta of .33, the stock is bought at a ratio of 3:1 to
the sold calls. You see that long stock + short call is equivalent to
a short put. So the total position looks like short call and short
puts in a ratio of 2:1. (The strikes will be different). This is a
ratio strangle. Ignoring interest, which is not a major factor for
high IV or short expiry.
The flip side of writing a strangle is to buy a strangle. You can do
this with either puts or calls. In the example, you would buy calls
and short the underlying in a 3:1 ratio. This long call + short stock
= long put. If you bought the puts, you would buy some stock for a
synthetic call. Either way, you own a synthetic ratio strangle.
The second case is not so sensible. In the first, you are betting
that the market has overestimated IV. If this is the case,
delta-hedging won't be so costly. In the second, you are betting that
on an undervalued IV. Hence any delta hedging will be costly. For
the second case of long volatility (vega), you would probably be better
to buying only options. However, the 2nd case is not bad if you don't
intend to be delta neutral as the underlying progresses (you will have
one direction that makes more money) or if the IV increases. But you
aren't "delta neutral" in this case.
A gamma neutral position can be obtained by writing/buying a strangle
where the gamma add to zero. It can be made delta neutral by shorting
or buying the underlying in a ratio that will negate the total delta
for the strangle. As stocks always have a "gamma" of zero, the total
gamma will stay unchanged; remain zero. With this position, you
should theoretically have to adjust your position less. I think for
most people you wouldn't want the three transactions. Especially if
you are going short vega (volatility).
In all cases, you will have to adjust your position as the underlying
moves to remain "delta" neutral. Adjusting the options will affect
gamma. If the gamma doesn't need adjustment, then the stock can be
used.
fwiw,
Bill Pringlemeir.
--
Schrodinger on QED: I don't like it, and I'm sorry I ever had anything
to do with it.