'Let Gamma run' or Delta hedging

[newwurldmn]

Quote from atticus:

It doesn't. Use BSM and accept the new vol-figure that is modeled at the time of the hedge. It's (more so) representative of the true expectancy. Are you stating that the assumption of static vol does not alter the expectancy? Intermediate vols under BSM and stoch will be different even if they are equivalent at the inception of the trade. "Inception expectancy" is really a flat-Earth argument. We both know that static vol and continuous hedge assumptions are bullshit.

Your expectancy argument assumes a perfect hedge and static vol. You cannot simply toss it out by stating expectancy is equivalent and model-independent when hedging is critical to the model.

Expectancy and hedging size, freq, etc., are inextricably linked and BSM assumes zero-convexity.

Your edits make your post more clear to me.
I understand what you are saying.

But then can't synthetically create two options via delta hedging based on two models and create an arbitrage? In practice, the positions would "offset" except where the models are different and would create a trade that would be positive expectancy.

 

[atticus]

Quote from newwurldmn:

Your edits make your post more clear to me.
I understand what you are saying.

But then can't synthetically create two options via delta hedging based on two models and create an arbitrage? In practice, the positions would "offset" except where the models are different and would create a trade that would be positive expectancy.

Let's say that your BSM hedge ratio results in a short at n-size that is >qty than the stoch-hedge and spot does a MR turn. BSM may produce a better pnl due to the "flat-vol" hedge. There is no certainty when you throw-out continuous hedging. BSM and stoch expectancy is bullshit. One just sucks less than the other as the hedging assumptions do not allow for "art". Discrete hedging allows it to be closed-form and tidy.

Both model expectancy on a continuous hedge scenario, but one assumes vol-elasticity.

 

[Cren1]

Quote from drm7:

You should read Volatility Trading, by Euan Sinclair. He goes over a lot of different delta hedging models.

Is it a lot different from this one?

 

[drm7]

Quote from Cren1:

Is it a lot different from this one?

I didn't read Option Trading, but the author ("filthy" on the NuclearPhynance forum) said that Volatility Trading is much more advanced. He intended Option Trading to be more of an introduction.

 

[Martinghoul]

That's the second book. I'd recommend you read "Volatility Trading" first.

EDIT: seems like my understanding is different to that of drm7. I read them in order.

 

[Angelo_60]

Quote from Martinghoul:

That's the second book. I'd recommend you read "Volatility Trading" first.

EDIT: seems like my understanding is different to that of drm7. I read them in order.

Option trading was second as pubblication date (2010) but it's just an introductory book. Not bad, not outstanding, there is some overlap with Sinclair's previous book.

Volatility trading was first published (2008), and it's for math-inclined people,
It is worth-reading, but I don't recall any REALLY NEW insight on how to implement different delta hedging methods.
Also, the chapters about "money management" and "psicology" seem a bit out of subject, but that's just my 2c.

 

[Cren1]

Quote from Martinghoul:

That's the second book. I'd recommend you read "Volatility Trading" first.

Ok, I found the most challenging one. Actually I read something of the simpler book and it's very easy, while I've read the introduction of the harder one and it looks like good, even though I've already studied all the volatility forecasting models presented in the index.

Is there really anyone who gots positive edge with GARCH family models?

 

[sle]

Quote from Angelo_60:

It is worth-reading, but I don't recall any REALLY NEW insight on how to implement different delta hedging methods.

I don't think there is such a thing as "different delta hedging methods". Optimal delta hedging is about trying to lock in the lowest volatility if you are short gamma and the highest volatility if you are long. You can go various ways about achieving it, but overall there are two general approaches - you try to find the optimal hedging frequency and/or you try to find an optimal hedging volatility. I, for example, have worked out a bunch of quantitative gimmicks to get there via optimizing the hedging frequency and over-hedging delta, but from what I've seen, each person makes up his own.

 

[sle]

Quote from Cren1:

Is there really anyone who gots positive edge with GARCH family models?

The answer is probably "not with GARCH models alone", but these models are semi-useful for predicting short term volatility (e.g. for hedging options that are expiring within days). From what I've heard, some floor guys use them.