Option pnl

[Deuteronomy_24_7]

Tailor expansion

That's when he lets out your suit?

 

[Robert Morse]

Tailor expansion is just a method of extrapolation using your derivatives up to the Nth order. You can make it arbitrarily precise depending on which derivatives you include, e.g. you can include all sort of secondary greeks to make your risk better during bigger moves. People used to run large exotics books using overnight calcs and interpolating risk through the day, though it works rather poorly for some specific cases.

Thx, above my pay grade.

 

[sle]

That's when he lets out your suit?

That's when you partied too much over the holidays and the pants need to be expanded. Can be avoided, of course

 

[sle]

Thx, above my pay grade.

Well, think about it this way. If all you have is delta one products, you can do simple P&L predict using delta only and it would be good enough. If you have an options book, you can go further and predict p&l based on delta/gamma/vega, but if you want to can add other risk metrics (e.g. you might feel like adding dVega/dSpot and dGamma/dSpot if you have a lot of skew exposure) and make it more precise.

 

[clarodina]

Dgammadspt measure change of skew? But the amount is so small what about dgammadvol? Which measure measure the shift of skew?

 

[sle]

I was just giving an example that you can arbitrarily increase the precision of your prediction by adding more derivatives. Your mileage will vary greatly.