Would you say that you should let your deltas run more so when vol is expanding versus when vol is contracting?
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Gamma Scalping Question - Purpose
- Thread starter jonny1lot
- Start date
Would you say that you should let your deltas run more so when vol is expanding versus when vol is contracting?
Would you say that you should let your deltas run more so when vol is expanding versus when vol is contracting?
Mathematically it does not matter. If you let your deltas run assuming the options are priced correctly, the long term expected value of this approach should converge to the alternative which is continuous hedging. The first approach will have a higher variance then the 2nd approach but they will converge over time. You need to understand that the efficacy of either approach is 100% contingent on your ability to forecast future volatility. Don't let any book or seminar tell you differently. You must build a robust model to do this.
You need to understand that the efficacy of either approach is 100% contingent on your ability to forecast future volatility.
Ok, this is starting to make more sense. This is the critical factor. You have to know how to forecast future volatility. What you never can know is when forecasted future volatility will equal actual volatility. The "letting your deltas run" is just a function of discrete versus continuous hedging. The less you let your deltas run, the closer you come to continuous hedging. Correct?
Ok, this is starting to make more sense. This is the critical factor. You have to know how to forecast future volatility. What you never can know is when forecasted future volatility will equal actual volatility. The "letting your deltas run" is just a function of discrete versus continuous hedging. The less you let your deltas run, the closer you come to continuous hedging. Correct?
Think of continuous hedging as hedging every second or every single tick. As I said before, commissions and bid/ask spreads aside, both over time will converge to the same expected value.
Think of continuous hedging as hedging every second or every single tick. As I said before, commissions and bid/ask spreads aside, both over time will converge to the same expected value.
Thank you for the help