gama-delta neutral

It probably works better on stocks than forex, but it should work in either case. What sort of problems are you having?
 
Not mentioned in the article is a type of hedge using options called the "static hedge" as opposed to dynamic delta hedging, since it only needs to be done once a month. It uses short-term options to gamma neutralize longer dated options. It seems to exist in academic lore as a legend since I have not seen an example of it.
 
Mystic,
I use variations of Static Hedging, and other Premium Sellers I know also use this type of approach [ time frame is the main difference]. Practical advantages include much lower margin requirements allowing for maximization of resources. It also allows me to take full advantage of strategic opportunities as they present themselves when the markets move up or down, if done simply on a montly basis the cost would generally be unsustainable. There is no set and forget, just as markets are dynamic, portfolios also need to be dynamic, this also probably explains the lack of information on purely static strategies.

Regards

Johno
 
Quote from Johno:
Mystic,
I use variations of Static Hedging, and other Premium Sellers I know also use this type of approach [ time frame is the main difference]. Practical advantages include much lower margin requirements allowing for maximization of resources. It also allows me to take full advantage of strategic opportunities as they present themselves when the markets move up or down, if done simply on a montly basis the cost would generally be unsustainable. There is no set and forget, just as markets are dynamic, portfolios also need to be dynamic, this also probably explains the lack of information on purely static strategies.
Regards Johno
More...
Johno,
I'm not sure that you are doing the kind of "static hedging" I was referring to. The academic papers talk about once a month because using an option portfolio to hedge you are gamma neutral and thus you do not need to do the daily rebalancing of dynamic delta hedging, which as you may know involves the buying or selling of shares or contracts to achieve neutrality.

Could you give an example of your "static hedging" and how that might be different from simple delta hedging?
 
Hi Mystic,
I've taken your comments regarding static hedging in a literal sense as I haven't read the article you refer to.
I was simply refering to the difficulty of implementing academic theories in real life situations. Myself and other premium sellers I know run portfolios that are dynamic due to the changing nature of the markets [ the changes in the markets would have to equal the changes in the greeks in order to remain Delta Neutral, over a period of time, as they are all interrelated] . At times these positions may stay static for days or even weeks, but then as the market evolves [ as it always has and always will] changes are required to both the portfolio and hedges. The changes and hedges I implement will reflect my view of the market and may be Bullish, Bearish or Delta Neutral , any one of these outlooks is easily achieved with options. Hence my comment similar but not the same. You can hedge off the greeks but the issue then becomes cost effectiveness, if the hedging doesn't lead to profit why bother!

Best Regards

Johno
 
Quote from Johno:
You can hedge off the greeks but the issue then becomes cost effectiveness, if the hedging doesn't lead to profit why bother!
More...
I'm not sure what you mean by this comment. Hedging is done off the greeks, meaning using the greeks. I don't know any other way. I think what you are hinting at is that some methods of hedging require a lot of capital which reduces the ROI.

I assume you are getting delta neutral or thereabouts with your income portfolio. The usual way of doing that is as I have described with shares or contracts to zero out the deltas or have the deltas match whatever market view you want to go with. Naturally as the market changes you continue to delta hedge. This is what the article refers to as "dynamic hedging".

The question is whether there exists a practical way to gamma and delta neutralize a portfolio using options alone, which the article indicates is "static hedging" because it is done nowhere near as frequently as delta hedging, which means it is more effective resulting in a greater profit.
 
Hi Mystic,
When I referred to hedging off the greeks,I meant the individual risk pertaining to - Gamma, Theta, Vega etc.
I have no doubt that a quant can accurately replicate a portfolios' risk, but I don't believe that it can be done, in a practical sense, cost effectively as an ongoing approach. Consider just one greek - Theta - buying short dated options to hedge long term risk, bear in mind the objective of staying gamma-delta neutral and the volume of options required to achieve this. Volitility in this situation is usually higher than that of the portfolio being hedged - higher priced relatively speaking - whilst time decay is accelerating, remember on expiry a new hedge must be purchased. If you found options ,cheaper,that achieve your objectives, it will be because they are miss-priced, if you see them, jump on them before they are arbitraged away by other traders.Very unrealistic to expect to find these opportunities on a month by month basis. Because of reasonably efficient markets risk will usually be priced fairly closely therefore other issues such as slippage,brokerage,cost of money etc come into the equasion. If you do the math the pressing question will be "where is the profit"

p.s. if I'm wrong please feel free to PM me [ please don't tell anyone else] with all the details as you will have found the holy grail - unlimited risk free profits. Just having a lend mate, Ha Ha Ha!

Best Regards

Johno
 
If all your options are in the same month, and there's lots of time remaining, it's easy to stay gamma and delta neutral. With lots of time remaining, you can be long one strike and short a nearby strike, and as the underlying moves from one strike to the other, your gammas don't change much. So if you start out delta and gamma neutral, you remain delta and gamma neutral.

But as you approach expiration, the gamma relationship between strikes begins to break down.

An example: If you're long the 100 strike and short the 105 strike 1 to 1, and there's a year remaining, it doesn't much matter if the underlying is at 100 or 105. Either way you'll remain fairly gamma neutral. So your delta position won't change much.

But if there's little time remaining until expiration and the underlying goes to 105, you're going to become very short gammas, which will throw off your deltas. If the underlying moves to 100, you'll become very long gammas, also throwing off your deltas. You'll find it very difficult to remain gamma neutral, and therefore very difficult to remain delta neutral. You'll find yourself having to adjust often, with unpredictable results.

Also, if all your options have the same expiration, then gamma neutral pretty much equals theta neutral and vega neutral. But if you have options with different expirations (calendar spreads), that relationship breaks down completely. That's because vega and theta have an opposite relationship with time. With a lot of time remaining, vegas are high and thetas low. With little time remaining theta is high and vegas are low.
 
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