Continous hedging as a rachet device to lock-in profits

[botpro]

I don't understand what you are doing. I can only program in Excel (or Fortran if I have a main frame).

It was you who asked me this:

Would you be kind enough to share your simulation parameters with me here?

And what I posted are the parameters used in my framework for GBM, BSM, and Hedging.
These are _just_ the parameters used in my C++ code, not any further code. I don't have any VBA or Fortran code.
BTW, nowadays Fortran is also available on the PCs ;-), especially in the GNU compiler collection (GCC) -> https://gcc.gnu.org/

 

[ironchef]

Thanks botpro for your reply.

I can't program in C++ so it is a moot point. I can and will use Excel for most of my studies.

 

[Gimpyron]

you guys made so much money from options that you let yourself spend soooo much time for nothing!!!
how you made all that money?

 

[blueplayer]

When selling options, hedging is inevitable.
There are two types of hedging:
- one-time hedging, and
- continously hedging (or dynamic delta hedging)
The second one is very interesting. It is IMO the best and also the most profitable
according to the very first few informations I read about it.
It works like a rachet device by locking-in the current profits.
The next hedging increment would be done if the position again gained in value,
for example the hedging increment would be repeated after every x% gain the set of these related positions makes.

I'm going to study this interesting trading tool.
Pls let me know of your experience or opinion about this type of hedging, especially when selling options.

Thx

I'm late to the party and this thread is funny in a sad sense. Botpro, you should not ignore the comments of real professionals here (like destriero and Martinghoul) the reality is that dynamic hedging of a short gamma position won't ever give you profits, just reduce your risk.

The best thing for you is to basically start using real money and test a short gamma position with dynamic hedging and see it for yourself.

 

[botpro]

The best thing for you is to basically start using real money and test a short gamma position with dynamic hedging and see it for yourself.

Sorry, but this is IMO a bad advice, because one first should study it throughly, do countless simulations etc. before risking any real money in the live-market.

 

[oldnemesis]

http://www.constitution.org/col/blind_men.htm

 

[ironchef]

http://www.constitution.org/col/blind_men.htm

But when you integrate the combined information/knowledge of all of them, a clear picture will emerge. Isn't it also true in options investing?

 

[ironchef]

This post is for botpro and those posters that helped me understand options pricing and profitability:

I did a simple Monte Carlo using Black Scholes and a normally distributed stock prices (pehaps not entirely correct and I should use lognormal but I think for low volatility and low risk free rate it is OK). The net profit of continuous hedging once a day was indeed ~+ - zero (B S assumed fairly priced options). So, no continuous hedge for a retail guy like me. I am not capable of analyzing analytically, so I will next numerically simulate different realized and implied volatility and look at the profitability.

There were some scenarios where some types of hedging created good outcome. Though only theoretical and B S equation, not reflecting real life, perhaps that is what botpro was trying to convey?

I do appreciate botpro raising provocative issues generating interesting discussions and let me achieved a better understanding.

Cheers.

 

[botpro]

ironchef, I'm busy with other stuff at the moment, but wonder what you mean by "~+- zero profit"?
Did you test options selling? And if so, is in that calculation the credit included?
Normally the credit should be the profit, because otherwise from a logical POV it wouldn't make any sense to sell options...

If possible just test this: let the spot fluctuate equal %distance up and down so that the HV stays constant, and advance the time... How does the result then look like?

 

[cvds16]

The whole idea of delta neutral hedging and the option theory behind it is to 'replicate an option' so of course if you sell one and replicate it accordingly the result should be zero if everything goes according to plan and within the restrictions held by the options model (no transaction costs for example).