Continous hedging as a rachet device to lock-in profits

botpro said:
Here's IMO a good scientific example and explanation about Delta Hedging:
http://fedc.wiwi.hu-berlin.de/xplore/tutorials/sfehtmlnode33.html
(Chapter 7.3.1 Delta Hedging, Example 7.2 and 7.3, selling calls and dynamically hedging them)

As I understand it so far:
The goal is to secure the credit one gets upfront for the selling of the put or call, ie. it's about keeping it fully.
For this goal one has to do some delta-neutral hedging. And if done right, then the profit is guaranteed; there is no loss.
This is science, not gambling...
Of course assuming normal market conditions with no Black Swan events.
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Amico, I think you've missed the point of this article... I don't need to read it fully to appreciate your unfortunate misunderstanding. The article discusses a setting where a bank (i.e. a market-maker) collects a premium for selling an option. This premium explicitly includes bid/offer and the purpose of dynamic hedging described is to retain as much of this bid/offer as possible with as little risk as possible.

Now lemme ask you, are you a bank? Are you in a position to charge the mkt bid/offer? If not, everything that other posters have previously told you applies. You cannot be short gamma and make money by hedging, especially if you incur transaction costs.
 
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When studying hedging literature, then one might wonder why they prefer PnL=0 ;-)
That is excluding the credit one already gets upfront when selling options.
Ie. the profit is the credit, and the goal of hedging is not to make any loss, because otherwise that would mean
a portion loss from the credit...

Hedging normally means buying on everage about half of the stock. Ie. it binds much capital.
I just wonder whether one can also hedge with additional options only, instead of buying the stock.
 
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you obviously don't have a clue whatsoever what you are talking about ... read up on option models and how they work ...
you seem to act like you have invented one of your own ...
hedging in options is mainly for option market makers or for volatility traders ... doubt you are either one of them ...
 
cvds16 said:
you obviously don't have a clue whatsoever what you are talking about ... read up on option models and how they work ...
you seem to act like you have invented one of your own ...
hedging in options is mainly for option market makers or for volatility traders ... doubt you are either one of them ...
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See my reply to Martinghoul's posting.
 
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botpro said:
Hey, just think I am a market maker, a bank, or an equivalent professional, or even retail, trader...
Then your statements don't apply... That simple is it...
Proof: do you think say a non-financial company XYZ is a market maker or a bank, when it needs to sell options?
No, it is not. Ergo: that company will use hedging as well!...
So, your argumentation that hedging can be used only by market makers is pure nonsense!... Q.E.D.
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Whoa!
 
Martinghoul said:
Amico, I think you've missed the point of this article... I don't need to read it fully to appreciate your unfortunate misunderstanding. The article discusses a setting where a bank (i.e. a market-maker) collects a premium for selling an option. This premium explicitly includes bid/offer and the purpose of dynamic hedging described is to retain as much of this bid/offer as possible with as little risk as possible.

Now lemme ask you, are you a bank? Are you in a position to charge the mkt bid/offer? If not, everything that other posters have previously told you applies. You cannot be short gamma and make money by hedging, especially if you incur transaction costs.
More...

Just think I am a market maker, a bank, or an equivalent professional, or even retail, trader...
Then your statement don't apply... That simple is it...
Proof: do you think say a non-financial company XYZ is a market maker or a bank, when it needs to sell options?
No, it is not. Ergo: that company will use hedging as well!...
So, your argumentation that hedging can be used only by market makers is pure nonsense!... Q.E.D.
 
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