Continous hedging as a rachet device to lock-in profits

[cvds16]

even market makers use the mid-point ... this idea of two delta's is totally illusional ...

 

[botpro]

man this is totally basic options theory stuff ... it's the same delta but when you buy the call you sell the delta: so -60 for example, when you sell the call you buy the delta: +60.
But it doesn't stay like that: there you have gamma which will move your delta-position: when you are short the call you will need to buy addidional delta, when it goes down you sell delta (yes you buy high and sell low). So you will lose money with your heging (like people have been on and on telling you)
When you are long the call, you sell more delta on the up, and buy delta on the down (here you buy low and sell high).

Now, let's also take selling puts and buying puts into the game:

Let's say
  CallDelta=0.55
  PutDelta =-0.45  (ie. the complement of CallDelta, but with negative sign)

Call_buying  --> sell CallDelta, ie. short 55 shares of the stock
Call_selling --> buy  CallDelta, ie. long  55 shares
Put_buying   --> sell PutDelta,  ie. short 45 shares (?)
Put_selling  --> buy  PutDelta,  ie. long  45 shares (?)

I think the above one is the textbook definition of delta hedging.
IMO it's not correct, because the directions don't make sense:
  Call_buying and Put_buying should be different in direction of the stock, but they are the same!
Same with selling:
  Call_selling and Put_selling should be different in direction of the stock, but they are the same!

So, the textbook definition of hedging, and what most of you have learned about hedging, is IMO probably wrong...

 

[cvds16]

you don't get it, what you write is the initial hedge, not the active delta-neutral hedging in proces ... this last thing derives from the gamma-scalping and that is where you lose your money if you are short the options and make money when you are long the options ...

 

[botpro]

you don't get it, what you write is the initial hedge, not the delta-neutral hedging ... this last thing derives from the gamma-scalping and that is where you lose your money if you are short the options and make money when you are long the options ...

Hedging does not differentiate between the initial hedging and the rebalancings later; it's always the same one algo.
Btw, I have Gamma in no way in the game yet... Just doing Delta-hedging only...

 

[cvds16]

no it's not I just changed my post a little bit to make it more clear
your problem is you don't understand gamma ... and how it affects the delta-neutral hedging in proces ...

 

[botpro]

no it's not I just changed my post a little bit to make it more clear
your problem is you don't understand gamma ... and how it affects the delta-neutral hedging in proces ...

As already said: Gamma isn't added in the game yet, doing just pure delta-hedging only...

 

[cvds16]

nope, it doesn't work that way ... you need it both: gamma affects delta ... you can't have one without the other ...
that's why you need to read a serious book ... it's not something I can explain here in a few lines ...

 

[botpro]

nope, it doesn't work that way ... you need it both: gamma affects delta ... you can't have one without the other ...
that's why you need to read a serious book ... it's not something I can explain here in a few lines ...

I have seen many papers and websites who only demonstrate delta-hedging without any gamma. So what do you say now?
If I'm not wrong, then even Black/Scholes/Merton have used only Delta in their classic paper, without any Gamma.

 

[cvds16]

ROFL ! you have no clue whatsoever what you are talking about ...

 

[botpro]

ROFL ! you have no clue whatsoever what you are talking about ...

If I had besides Delta also Gamma in my calculations, then I'm sure you and your ilk would come with another factor,
another greek, that you would say belongs into the hedging...
Come on, I know too well how some of you guys do "function"...