Continous hedging as a rachet device to lock-in profits

cvds16 said:
and delta hedging almost continously is being done by market makers ... rest assured !
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That I can't believe! Because there are also many other options sellers who as well do hedging, but who are not any MMs...
 
I used to be market maker, I have know tons of market makers, how many market makers do you know ... yes there were the ones that didn't hedge properly ... they almost all blew up ...
 
ironchef said:
cvds16 is right.

I think you were the one directed me to this site:

http://faculty.baruch.cuny.edu/lwu/9797/EMSFLec5BSmodel.pdf

Read the lecture given by Prof Wu. If you look at the Black Scholes equations:



If you use a Monte Carlo, in an ideal Black Scholes, you will get the same outcome with some statistical error. If you use real world data to back test, you may get a slightly different outcome.

Regards,
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I think in the above paper also Gamma hedging was explained... I'll take another look at it...
 
cvds16 said:
if you want to trade vol you got to hedge of course ... but that's a game way above your level
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Never underestimate botpro! botpro can master them all, it's not rocket science, man! At least not for botpro... :D
Btw, have I told you already? Rocket science is not very complicated... :D
 
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botpro said:
From the famous article that was recently posted here or in an other of the options threads:
http://www.riskencyclopedia.com/articles/dynamic_hedging/
"To recap, dynamic hedging of a negative gamma position loses money. Dynamic hedging of a positive gamma position makes money. To make sense of this observation, note that negative gamma positions arise when you sell options. You receive a premium for selling the options but lose money dynamically hedging the negative gamma position. Positive gamma positions arise when you buy options. You pay a premium for the options but make money dynamically hedging the long options position."
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Ok, here is some more info about Gamma, this time from the said other paper:
http://faculty.baruch.cuny.edu/lwu/9797/EMSFLec5BSmodel.pdf
"
Gamma is high for near-the-money options.
High gamma implies high variation in delta, and hence more frequent rebalancing
to maintain low delta exposure.
"
Ok, everything that helps to reduce the number of rebalancings is of course good...
 
look up gamma-scalping on google ... that might make you somewhat wizer ... gamma-hedging is not a term I am familiar with ... unless you mean that market makers want a balanced portfolio of their Greeks ...
 
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