Is Vanna relevant when Gamma scalping?

Discussion in 'Options' started by TskTsk, Jan 30, 2012.

  1. TskTsk


    As you know, the P/L from a gamma scalp is 0.5*gamma*S^2 (where S is spot movement). However isn't delta affected by other factors such as Vanna, thus isn't the formula useless for predicting P/L per scalp (because it only takes gamma into account)?
  2. Link to the proof?

    PS: why a different handle?
  3. newwurldmn


    It's small unless you are running a very levered skew book.
  4. TskTsk


    Alright thanks

    Dont have any proof, it's a formula I picked up on the NP forums. I've seen it used elsewhere as well so I just assume its correct.
  5. jsp326


    Only when she's drunkenly flipping letters on a game show.
  6. newwurldmn


    Ignore TradingJournals. He knows little of what he speaks.
    What is the NP forum?
  7. sle


    The delta component would be small. The mtm component dVega/dSpot can put you in sufficient amount of pain, but I assume you are calculating as if you are holding it to expiry.
  8. NucPhy (Nuclear Phynance)...

    And yes, the formula is a correct quick 'n dirty one, but, like all such formulae, it's an approximation. It's obtained simply from the Taylor series expansion, by discarding higher-order terms, because they're assumed to be less significant.
  9. newwurldmn


    but even that would generally be small compared to dC/dsigma unless you were hedge in vega.

    Assuming you don't have something crazy convex or a huge move in vol.
  10. TskTsk


    What I'm looking for is basically a way to calculate P/L per scalp when you're long gamma and continuously hedging delta. As far as I understood, 0.5*gamma*S^2 is ~accurate, but I fear there are other factors at play that may influence my P/L per scalp, so my question is what would these other values be? I understand vanna is negligible...and I disregard any IV movement as I hold until expiry.
    #10     Jan 30, 2012