Wednesday, February 22, 2012

Delta hedging's popular, what about gamma/vega hedging?

Lyuu's research paper explores the modeling of portfolio value between delta and delta + gamma hedging. The reason we'd want to hedge gamma or vega with other options, is so that we may lower the expected cost of hedging respective to potential portfolio returns.

The bottom line here's pretty simple. A long theta position that's delta + gamma/vega neutral has much more desirable risk containment, cause negative gamma kills. .

Delta-hedging alone requires forecasting of realized volatility
Derman explains this pretty well in the following study,

0 Reflections: