Delta Neutral not so neutral ?

nononsense · Jun 2, 2006

Quote from cnms2:

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But, as you minimize your risk you'll reduce your potential for profit too.

That's all the better "quants" are sometimes capable of.
Making money is altogether a different problem.

riskarb · Jun 2, 2006

Quote from yip1997:

Cool! Thanks a lot. Since I never used vega in my trading decision, just want to confirm my understanding here.

Now I have OIH with position vega = -400, does it mean i will make 400 with 1% drop in implied volatility?

Correct

Tums · Jun 3, 2006

Quote from MTE:

Delta neutral positions get long/short deltas when the market moves as Gamma starts manufacturing Deltas.
So in order to be immune to market moves you need to be both Delta and Gamma neutral.

how do I become Gamma neutral?

nitro · Jun 3, 2006

Quote from Tums:

how do I become Gamma neutral?

Gamma is equal to dVega/dVol for your option's position. Set dVega/dVol = 0 and control in realtime.

dVega/dVol is [generally] nonlinear, so there is no way to know ahead of time what the hedge is as time evolves, especially as the underlying moves to extremes in comparison to your [options] position.

nitro

MTE · Jun 4, 2006

Quote from Tums:

how do I become Gamma neutral?

Quote from nitro:

Gamma is equal to dVega/dVol for your option's position. Set dVega/dVol = 0 and control in realtime.

dVega/dVol is [generally] nonlinear, so there is no way to know ahead of time what the hedge is as time evolves, especially as the underlying moves to extremes in comparison to your [options] position.

nitro

In simple terms, you solve a system of two equations, one for Delta neutrality and the the other for Gamma.

You position delta/gamma is the weighted sum of individual deltas/gammas. Write out the two equations, equate them to zero and solve for the weights of the individual components.

Tums · Jun 4, 2006

thanks M & N.
any books I can get on the subject?

riskarb · Jun 4, 2006

Quote from nitro:

Gamma is equal to dVega/dVol for your option's position.
nitro

No, it's not. dvega/dvol [vomma] is the convexity of vega expressed by a change in volty. It is to vega what gamma is to delta.

IV_Trader · Jun 4, 2006

Quote from riskarb:

No, it's not. dvega/dvol [vomma] is the convexity of vega expressed by a change in volty. It is to vega what gamma is to delta.

B , any practical use for vomma ? In some cases IV can go up 5 point , but Vega stays the same ( hence , vomma = 0 , right ?) , but next IV's point jump suddenly doubles vega.

nitro · Jun 4, 2006

Ugh,

Sorry. dVega/dVol is not equal to gamma, but the rest of it is correct in the context of the question.

All that dVega/dVol is the sensitivity of how an infinitesimal change in volatility affects Vega (Kappa.) So understanding this curve allows you to adjust your options positions to stay gamma neutral.

dVega/dVol is the second derivative of option premium with respect to a change in volatility. The realization that gamma must be hedged continously is understood more clearly if you graph Vega versus volatility and take the derivative at each point. The slope (derivative) of that graph at each would be dVega/dVol at that point.

The greater the curvature the more frequent the adjustments have to be in time. This is all basic Calculus.

nitro

Quote from riskarb:

No, it's not. dvega/dvol [vomma] is the convexity of vega expressed by a change in volty. It is to vega what gamma is to delta.

taowave · Jun 4, 2006

Quote from yip1997:

Does it happen often? Can we predict it and use it as part of our trading strategy?

You can be fairly confident that after a market decline where implied vols get pumped,should the market rally,the vols will get crushed.....You benefitted from that

Also,was your delta being calculated off implied vols or a flat vol?

And most important,it appears that your position is predominantly a vega bet.Your delta and gamma are tiny relative to vega...

I would reccomend you read Natenberg for starters,play with an option/position simulator and understand the true risk of your position.