Valuation and Risk
Trading and Hedging
Delta hedging, managing gamma and vega, market making and volatility trading.
Practitioner3 pagesAdvanced2 pages
1Hedging
- PractitionerDelta HedgingEven when the same option is hedged, the profit or loss up to expiry depends on the path the underlying price takes.
- PractitionerManaging Gamma and VegaThe one-day profit or loss of a delta-hedged position is gamma times the gap between the squared return and a value set by the implied volatility.
- AdvancedHedging Exotic ProductsNear maturity, a digital seller holds far more underlying than the maximum payment, and hedging losses or costs can exceed the maximum liability (pin risk).
2Trading
- PractitionerMarket MakingThe revenue is the difference between the bid and the ask, but price moves on inventory and trades with better-informed counterparties can cause losses.
- AdvancedVolatility TradingA delta-hedged long straddle profits when the gamma gain exceeds the theta cost, and a short position is the reverse.