'Let Gamma run' or Delta hedging

Discussion in 'Options' started by Cren1, Dec 1, 2011.

  1. newwurldmn

    newwurldmn

    Your edits make your post more clear to me.
    I understand what you are saying.

    But then can't synthetically create two options via delta hedging based on two models and create an arbitrage? In practice, the positions would "offset" except where the models are different and would create a trade that would be positive expectancy.
     
    #41     Dec 2, 2011
  2. Let's say that your BSM hedge ratio results in a short at n-size that is >qty than the stoch-hedge and spot does a MR turn. BSM may produce a better pnl due to the "flat-vol" hedge. There is no certainty when you throw-out continuous hedging. BSM and stoch expectancy is bullshit. One just sucks less than the other as the hedging assumptions do not allow for "art". Discrete hedging allows it to be closed-form and tidy.

    Both model expectancy on a continuous hedge scenario, but one assumes vol-elasticity.
     
    #42     Dec 2, 2011
  3. Cren1

    Cren1

    Is it a lot different from this one?
     
    #43     Dec 3, 2011
  4. drm7

    drm7

    I didn't read Option Trading, but the author ("filthy" on the NuclearPhynance forum) said that Volatility Trading is much more advanced. He intended Option Trading to be more of an introduction.
     
    #44     Dec 3, 2011
  5. That's the second book. I'd recommend you read "Volatility Trading" first.

    EDIT: seems like my understanding is different to that of drm7. I read them in order.
     
    #45     Dec 3, 2011
  6. Angelo_60

    Angelo_60


    Option trading was second as pubblication date (2010) but it's just an introductory book. Not bad, not outstanding, there is some overlap with Sinclair's previous book.

    Volatility trading was first published (2008), and it's for math-inclined people,
    It is worth-reading, but I don't recall any REALLY NEW insight on how to implement different delta hedging methods.
    Also, the chapters about "money management" and "psicology" seem a bit out of subject, but that's just my 2c.
     
    #46     Dec 3, 2011
  7. Cren1

    Cren1

    Ok, I found the most challenging one. Actually I read something of the simpler book and it's very easy, while I've read the introduction of the harder one and it looks like good, even though I've already studied all the volatility forecasting models presented in the index.

    Is there really anyone who gots positive edge with GARCH family models?
     
    #47     Dec 4, 2011
  8. sle

    sle

    I don't think there is such a thing as "different delta hedging methods". Optimal delta hedging is about trying to lock in the lowest volatility if you are short gamma and the highest volatility if you are long. You can go various ways about achieving it, but overall there are two general approaches - you try to find the optimal hedging frequency and/or you try to find an optimal hedging volatility. I, for example, have worked out a bunch of quantitative gimmicks to get there via optimizing the hedging frequency and over-hedging delta, but from what I've seen, each person makes up his own.
     
    #48     Dec 4, 2011
  9. sle

    sle

    The answer is probably "not with GARCH models alone", but these models are semi-useful for predicting short term volatility (e.g. for hedging options that are expiring within days). From what I've heard, some floor guys use them.
     
    #49     Dec 4, 2011