Delta Neutral not so neutral ?

Discussion in 'Options' started by Tums, Jun 1, 2006.

  1. That's all the better "quants" are sometimes capable of.
    Making money is altogether a different problem.
     
    #11     Jun 2, 2006
  2. Correct
     
    #12     Jun 2, 2006
  3. Tums

    Tums

    how do I become Gamma neutral?
     
    #13     Jun 3, 2006
  4. nitro

    nitro

    Gamma is equal to dVega/dVol for your option's position. Set dVega/dVol = 0 and control in realtime.

    dVega/dVol is [generally] nonlinear, so there is no way to know ahead of time what the hedge is as time evolves, especially as the underlying moves to extremes in comparison to your [options] position.

    nitro
     
    #14     Jun 3, 2006
  5. MTE

    MTE

    In simple terms, you solve a system of two equations, one for Delta neutrality and the the other for Gamma.

    You position delta/gamma is the weighted sum of individual deltas/gammas. Write out the two equations, equate them to zero and solve for the weights of the individual components.
     
    #15     Jun 4, 2006
  6. Tums

    Tums

    thanks M & N.
    any books I can get on the subject?
     
    #16     Jun 4, 2006
  7. No, it's not. dvega/dvol [vomma] is the convexity of vega expressed by a change in volty. It is to vega what gamma is to delta.
     
    #17     Jun 4, 2006
  8. B , any practical use for vomma ? In some cases IV can go up 5 point , but Vega stays the same ( hence , vomma = 0 , right ?) , but next IV's point jump suddenly doubles vega.
     
    #18     Jun 4, 2006
  9. nitro

    nitro

    Ugh,

    Sorry. dVega/dVol is not equal to gamma, but the rest of it is correct in the context of the question.

    All that dVega/dVol is the sensitivity of how an infinitesimal change in volatility affects Vega (Kappa.) So understanding this curve allows you to adjust your options positions to stay gamma neutral.

    dVega/dVol is the second derivative of option premium with respect to a change in volatility. The realization that gamma must be hedged continously is understood more clearly if you graph Vega versus volatility and take the derivative at each point. The slope (derivative) of that graph at each would be dVega/dVol at that point.

    The greater the curvature the more frequent the adjustments have to be in time. This is all basic Calculus.

    nitro
     
    #19     Jun 4, 2006
  10. taowave

    taowave

    You can be fairly confident that after a market decline where implied vols get pumped,should the market rally,the vols will get crushed.....You benefitted from that

    Also,was your delta being calculated off implied vols or a flat vol?

    And most important,it appears that your position is predominantly a vega bet.Your delta and gamma are tiny relative to vega...

    I would reccomend you read Natenberg for starters,play with an option/position simulator and understand the true risk of your position.
     
    #20     Jun 4, 2006