The problem with short gamma

Discussion in 'Options' started by nitro, Mar 20, 2010.

  1. heech

    heech

    If you're only looking at your positions on two days:

    1) the date you open them,
    2) the date they expire...

    The Greeks aren't useful to you. They really don't matter.

    The Greeks are only useful if you're trying to understand (and of course compensate/hedge) how your position value changes from day to day.
     
    #41     Mar 24, 2010
  2. I derive all of my income from trading. My main goal is preservation of capital with a return that pays my bills.
     
    #42     Mar 25, 2010
  3. They are important if you are interested in turning a potentially losing trade into a winner or even reduce your intended loss.
     
    #43     Mar 25, 2010
  4. nitro

    nitro

    I have resigned myself that in order to trade options in the way that I want to trade them, I must have an underlying model that works, and probably on the high frequency.

    It took some serious withdrawal symptoms and final acceptance through a painful process, but once flushed of the demon, it opened for some interesting ideas. I am now in the hunt for a high frequency underlying (stocks) system. I am pretty sure that I have a decent options system if I didn't have to worry about delta neutrality, but that is not my reality since I don't have access to variance or vola swaps. Starting from a simple premise as to how Rentec trades, almost all of the repercussions of an underlying HFTS must be highly constrained, so at least the search space is not infinite, or at least countable, aleph-null.

    “The greatest deception men suffer is from their own opinions.” - Leonardo da Vinci
     
    #44     Mar 26, 2010
  5. nitro

    nitro

    [​IMG]
     
    #45     Mar 26, 2010
  6. Nitro, are you employed now?

    Also, please enlighten me, why do you need var swaps to maintain delta neutrality?
     
    #46     Mar 26, 2010
  7. heech

    heech

    Right. A var swap wouldn't help you, if your goal was to buy/hold a straddle or any other type of static position. A trending but low volatility underlying would still blow you out.

    I don't think you really need to automate though. You really just need to delta hedge once a day, and then you'll get a pretty good approximation of having a pure-vol position.
     
    #47     Mar 26, 2010
  8. nitro

    nitro

    "...A perfect hedge with a constant aggregate gamma for all underlying levels would take infinitely many options struck along a continuum between 0 and infinity and weighted inversely proportional to the squared strike. This is etablished rigorously in Section 3.2. Note that this is a strong result, as the static hedge is both space (underlying level) and time independent."

    http://math.uchicago.edu/~sbossu/VarSwaps.pdf
     
    #48     Mar 27, 2010
  9. nitro

    nitro

    Ok, let's simmulate it. Come monday, I will give you a calendar straddle making you gamma short (short front month long next back month). You hedge the position delta once a day at a predetermined time, for a week and see how you do. You don't get to adjust the straddles strikes.

    You up for the challenge?
     
    #49     Mar 27, 2010
  10. Variance swaps are a great vehicle it seems for pure volatility trades.

    How can one get access to these instruments? Hwo liquid are they?

    What houses are the major players for these OTC instruments.

    Why doesn' the CME or EUREX create exchnage traded versions of variance swaps?

    Thanks
     
    #50     Mar 27, 2010