I'm sure a lot of you are familiar with this piece, but I'll post it anyway. Some good stuff on this topic. http://www.math.ku.dk/~rolf/Wilmott_WhichFreeLunch.pdf
if you have a model for calculating the delta bounds for an option, how do you calc the delta bounds for a multi-leg position ? just adding the bounds of each legs ?
Yes. All greeks are additive, thankfully. Unfortunately, the only way you will spot modality, as in a wrangle spread, is either graphically or a table/slide.
I think you have to be careful with vega. At least adjust by root-time (if trading calendars), then add.
@spec77 . Sorry. Formulas and derivations are currently out of my depth. My concept of delta band is my max delta exposure based on elementary (% capital/portfolio at risk) ideas. @longthewings Thanks for the reminder. Vega risk is different across the term structure.
Btw, I just came across our original topic on starting on p 89 Chapter 3.5 Stretching the Black-Scholes Assumptions in Colin Bennet's book: "Trading Volatility ". http://cfe.cboe.com/education/TradingVolatility.pdf
One measure of the relative volatility of a particular stock to the market is its beta. A beta approximates the overall volatility of a security's returns against the returns of a relevant benchmark (usually the S&P 500 is used). For example, a stock with a beta value of 1.1 has historically moved 110% for every 100% move in the benchmark, based on price level. Conversely, a stock with a beta of .9 has historically moved 90% for every 100% move in the underlying index.
Thanks for the interesting article. Using the term Actual Volatility in the article is also interesting too!