Hmm. no, I'm interested in locking the profits... really!... ;-) Do you mean hedging cannot work for that? stepandfetchit in posting #4 confirmed that it works, at least with long calls. short put is a synthetic for long call...
step doesn't know what he's talking about. what he mentions is no hedge. The puts are worth 150 out to July. You act as if there is tremendous gains to me made. Hedging reduces profits. You don't "lock-in" profits by hedging short gamma. It's always a hedge into your risk. Conversely; long-gamma scalping involves taking profits due to accumulated delta in the primary position. Again, you've got it ass-backwards.
Hmm. you should not humiliate or talk such negative about other users in such public forums. If you do, then they won't post anymore, and that is not good for the business model of the site... Imagine this counterexample: you are long call and the value of your position is +30%. now you go and lock the status quo with a long put. So you locked-in the 30% profit, whatever even might come in the future (that is of course as long as the volatility doesn't drop). If that assumption is true, and I'm sure it is, then the rachet mechanism should work similar... But it seems one has to begin a new set of trades on top of these locked ones... Of course one also could close the long call immediately to pocket-in the 30% profit. But I wanted to use a similar example in the options selling case, and then it not always makes sense to close early, so one needs to "lock-in"...
NO, that's the point. Gamma-scalping (long gamma) earns from the leverage from gamma. SHORT GAMMA (short the put) LOSES due to gamma... bc you're SHORT IT. Deltas accumulate as the shares move against your position, and they are not linear. Recall that the initial delta position is 20... which becomes 50 if the shares touch $90. The increase in delta (risk) is the result of gamma. The guy long those puts can lock-in the gains by taking the opposite delta position in shares or options (or both). The downside for the long-gamma guy is a drop in vol, passage of time, or both. Think of time as synthetic volatility. If he buys 20% vol today and holds the position for a week... and the shares are unchanged... he will need a vol-line of 21.3% to break-even on his option position.That is why short vol is so appealing to some. The long-gamma trader uses the underlying options to lock the gains to gamma. YOUR POSITION LOSES TO GAMMA. Your hedge in shares and/or options is to reduce risk, not lock-in a gain. Dynamic hedging (and gamma-scalping for long gamma) is primarily for the trader trading a single-name as a MMer or other sell-sider. Dynamic hedging is reactionary -- you hedge because you're losing. Gamma-scalping is opportunistic -- you trade against your long gamma to lock-in delta (and ostensibly, gains) Truly I am done. It's like talking to a Surf quant. Me: "You're short gamma -- the leverage hurts your position" You: "No f*cks given. I have a banana!"
I'm glad you are done. Now we the rest can finally discuss in a civilized manner... ;-) Without your foul language...
I'll chime in having some experience with retail dynamic hedging....it sucks. As destriero says, ultimately you are only locking in losses because your hedge frequency will increase as the underlying moves against you, and unless you peel the hedges off at breakeven or marginal gain (or marginal loss), you are in effect taking potential gains away from your initial short option position. The situation you will find yourself in as the underlying whipsaws back to the price you initiated your delta hedge, you'll ask yourself, "okay, take off at breakeven/slight gain/slight loss and see where price goes from here", and then sometimes you get lucky and price continues in your favor and you can take some time to relax and reassess the position. But as we've seen in these choppy markets (and to be more specific, just say your are short ATM puts in ES and delta hedge creating synthetic short straddles or positions similar in nature), price will take out your hedge only to roll over in the afternoon or the next day or the end of the week, forcing your hand and more than likely leading you to lock in losses. I will say this, ES price action has been favorable to this type of strategy the last few years in the sense that the downside moves have all corrected back to new highs, so when you peel off your delta hedges, price has continued in your favor (it might look like we are in that situation as we speak, but there are a number of recent examples, China August of last year, Ebola october 2014, Congress dicking around with sequester and budget stuff a few years ago, Greece a few years ago, etc. etc.) This is assuming multiple month timeframe positions (2-3 or more) From my point of view, I try to plan for 2000-2003 type market action where the market just kept chopping and making new lows. That is a delta hedge nightmare if you are talking about positions you will keep for say 2-3 months. That's where capitalization/averaging in come into play. You have to have enough bullets to roll for multiple months/years if we have that type of market action. And hopefully you are rolling at what happens to be a yearly VIX high of 50 and your roll is 6 months out and relatively sized up. To close, you have no idea what you are talking about until you see it first hand, the theory all makes sense, but until you have just closed out of a delta hedge on a 9:45am market ramp and then the thing rolls over into the close forcing you to reapply your hedge and count the losses against the potential profit of the short option at expiration, you don't know what it's really like. I would suggest doing a live test right now, especially if the market rolls over again, you would understand delta hedging first hand. For what it's worth, everything I'm doing is discretionary price action (read: amateur) delta hedging. I go with what price is doing on the daily and obvious levels in case of short term high vola moves.
That's a very good post Shooter...My limited experience in applying similar strategies years back (I won't even attempt it nowadays) was similar frustration...Another potential pitfall is the activity in the night session (during Europe and China/Japan)...just these past 3 months (and also last Aug-Sep) have had greater ranges than many RTH sessions...so realistically, one becomes a slave to the markets 24 hrs per day...and of course there are whipsaws galore in the middle of the night, chasing hedges higher/lower, etc, etc... I'd much rather just pick my spots and then go to the sidelines the vast majority of the time...There are just too many macro influences on these markets that will squeeze a position into making the exact wrong adjustment at the worst time possible.
Here's IMO a good scientific example and explanation about Delta Hedging: http://fedc.wiwi.hu-berlin.de/xplore/tutorials/sfehtmlnode33.html (Chapter 7.3.1 Delta Hedging, Example 7.2 and 7.3, selling calls and dynamically hedging them) As I understand it so far: The goal is to secure the credit one gets upfront for the selling of the put or call, ie. it's about keeping it fully. For this goal one has to do some delta-neutral hedging. And if done right, then the profit is guaranteed; there is no loss. This is science, not gambling... Of course assuming normal market conditions with no Black Swan events.
Yes, there is nothing worse than 3am Monday hedging and your mark-to-market already looks like shit...."is this real life?" In regards to my ES delta hedging, this is not much different then swing trading VXX or similar vol products with stops/scaling in and out. Just take into the 'stock' vs. futures elements, like borrow yield, trading hours etc. There's also the important curve element, ha.