A sharp move in underlying frequently does not translate into an increase in the implied volatility (e.g. take a look at changes in the index vols yesterday, with a 4.3% day in S&P). Delta hedging, oddly enough, works, though it's more of an art then a science and, in most cases, you want to be very smart about it.
Yeah that's not what I meant. I was implying that he had an "edge" in either realized vol or implied vol and if "realized" vol actually turned out to be profitable, he should get out and take a profit. Hence why I asked him if he actually had an "edge" in his vol forecast.
My personal experience when I ran a vol book was that if you are hedging daily, the bid offer + commissions is actually quite substantial. The reason is that bid-offer and commissions can equate to (say) 1 vol point. How much edge you atually get in an option? 2-3 vol points? Unless you are trading against some catalyst where your pnl volatility (in vol points) can be like 10-15, your commissions will be high relative to your pnl. There are funds that make money trading vol. They are insanely quantitative and my impression is that they use a lot of leverage - the kind a high quality prime broker will give you (with good correlation assumptions, etc). It is unlikely you will make money delta hedging every day. To answer your original question about when to delta hedge: it depends on your delta view. If you think a stock will continue to run, you don't hedge. If you think the stock could mean revert then you do. Or you do it on some consistent rule - but at the end of the day whether it is good or bad depends on mean reversion or not.
This completely defeats the purpose of being a market neutral gamma scalper. You can't suddenly be deciding on direction. If he had that skill set to begin with he should have taken the directional risk from the outset and not wasted his time adding vol risk. Kind of like an atheist suddenly becoming religious just for the day for some good luck.
I agree with you. After trading vol for many years, I came to the conclusion that trading vol and hedging daily is pointless (especially if you don't work at a bank where capital is meaningless). There are many who make money trading vol like this, but they have significant platforms and access to leverage (hedging takes up a lot of balance sheet and reduces your return on capital).
Not high liquid at all. I started with equity options but I've seen that the bid-ask spread is too great. Then I switched my attention on many index and the 25 most traded ETFs. Options on those ETFs are negotiated on CBOE and I noticed that their bid-ask spread is smaller than equity's. Not technical analysis at all I usually study the implied volatility term structure to find strong imbalances. In this very moment I study only the ATM IV term structure; I'm not ready for the DOTM IV term str., yet. Because of this, it is immediately evident that the most frequent position I have is long or short calendar spread. That's an important topic: I'm now hedging Delta twice in a day (on market opening and on market closing), but I'm looking for criteria which are smarter than the "fixed time". I know also a criterion which involves the so called "Delta1%" and "Gamma1%" but I do not master it. Do you think that hedging Delta at "fixed time" but more rarely is better because of less transaction fees?
You should read Volatility Trading, by Euan Sinclair. He goes over a lot of different delta hedging models. Some more food for thought here: http://www.math.ku.dk/~rolf/Wilmott_WhichFreeLunch.pdf
ahhh , to scalp or let the deltas run⦠One thing is for sure : with big up move , close the combo with profits and reenter ( if you must) new ATM