Below is a sample of position : Long 60 days delta neutral combo Short 30 days combo I'm trying to figure out the ratio based on Gamma(don't have a lot of experience here; never needed before) , but I'm confused how can one get neutral/balanced on something that is not linear. Instead of balancing Gamma , I'm calculating the "max pain" scenario: at what future price(when ITM or deep ITM) loss on 1:1 ratio will stop to escalating and then going back and assign the correct ratio. Looks good , but I wonder if the same can be achieve by strictly using Gamma #. More details on the position: 1. I don't care where the 30 IV will go after I took position , I will always hold the short combo till exp. 2. I'm constantly balancing the 60 days combo by keeping delta neutral(via increasing # of calls or puts when needed) TIA
Have you ever looked at Peter Hoadley's option add-in? It will automatically calculate a delta/gamma hedge for you -- for just one thing... www.hoadley.net More generically, if you are near a bookstore McMillian goes through an example or two in his Options as a strategic investment. There is an example on page 879-880 in the 4th edition -- no idea what he is up to now. Basically, it just advises going gamma netrual first by taking the ratio of the options gamma's to each other: Ex. Oct 60 Call Gamma: 0.05 Oct 70 Call Gamma: 0.025 Gamma neutral is 2:1 Then do delta the normal way. Th conclusion is to adjust the delta for every Gamma neutral ratio. So, if position delta is +10 shares then for every 1 Oct 60 L and 2 Oct 70 short you would adjust with a long 10 shares as well. The book gives a better explanation but hopefully that gives you the idea... Obviously, your example is more complex as you have combo's and only one side delta neutral.
thanks for all the sources , SS , I will take a look . I don't think that those simple calculations (in your sample , 2:1) will work on the combo level and that is my major concern.
Hey IV -- I don't really follow your question, but the position outlined is simply a long put and call calendar. Same-strike calendars are fungible, so it's the same as being long 2*call(put)calendars. It's simply doubling the exposure to combo the position. Regardless, the gammas are downside in exposure, so your gammas decrease as you trade away from the strike, but so does your PnL. Trading the ratio >1:1 will flatten gammas but increase your long vega even more. It's impossible to net-exposure on these, at least practically-speaking.
thanks for replying , R-A . I will put the real # below to clarify it more: XYZ at 100 , IV=25 Long 60 days ATM straddle ( gamma=3.9) , cost 8$ Short 30 days ATM straddle ( gamma=5.5), cost 5.60$ If I go by gamma (5.5/3.9) then the ratio is 1.4 , so: 14 long 10 short After 30 days XYZ at 93 Long straddle =8$ , p&l = 0 Short straddle = 7$(all intrinsic) , p&l = (5.6-7)*100= loss of 1300$. In the sample above , I went gamma neutral (I think) and have a irreversible loss of 1300$. ?
Nobody replied so for what it's worth I'll give you an off the top guess: Most of the Greeks are defined "for small changes in the underlying". So you may have been gamma neutral initially, but unfortunately the underlying had a pretty big swing and Gamma became unbalanced along the way. If you were monitoring Gamma you should have seen it change.
thanks , Don. Your reply just reaffirms my initial thoughts about balancing something not linear. I already find my own solution how to address this situation. The above position wasn't real yet , good that I run "what if" scenarios first