Hi, I'm new to options and had a quick question regarding delta hedging. Lets say i believe implied vol is cheap in the market, and go in and buy options. When i hedge, will i use the market's implied vol to determine my delta, and thus how many underlyings to go short? or do traders usually use their view of what vol really should be to calculate delta. From my understanding, depending on what volaitilty is used, one will get a different delta values, which will in turn affect how one delta hedges his/her options. Thanks very much for any help! A
Take a look at this: http://www.google.com/url?sa=t&rct=...VroJCypPtZdNPz1ww&sig2=sicj6SuO7s61pI0tRFf5wg On page 9 in the PDF, the pros and cons of hedging with each volatility is listed.
This strategy is made very simple today. There are ETNs on the VXX. If you think vol is moving up, buy the VXX. That way you don't buy options and pay decay. If you believe option vol is too high short the VXX futures. If you're a buy of options, this is a very short term strategy. Most option buyers lose money over time. My advise is to learn about the VXX. http://www.ipathetn.com/us/product/...oogle&kw=vxx&gclid=CKf745zk9bACFYdQOgodJUdBEg The answer to your question, traders use current greeks from the vol implied by the NBBO midpoint.
There are actually two factors that matter when hedging delta - the level of implied vol for the option and the dynamics of volatility with respect to spot. The combination of the two will determine the expected change in option price with a small change in underlying, which is your delta. 1245 is wrong, market makers do not simply use implied vol for the current option price. Most MMs would have a vol model that incorporates both the implied vol as well as vol dynamics. In fact, smart delta hedging is a big part of the market makers edge.
Have you taken a look at the equity curve for VXX? You don't avoid decay when you buy VXX; it's more like you embrace it. There are a lot of strategies for going long volatility, and anyone doing so would, one hopes, only have a time horizon measured in days anyway. VXX isn't giving you any advantage; actually, quite the opposite.