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Mar
7
comment Delta Neutral / Gamma Neutral Positions
Hard to say, and you aren't clear by what you mean by sell vega: simple headline vega, or normalized in some way (sqrt time, or by vol of vol of the tenor or something). As was pointed out, vegas of different tenors aren't additive. If you're doing a gamma neutral calendar to sell headline vega, you're gonna be long more vega in the front which is gonna get hit more than the back. You need to look at your expected spot move, and the expected move of the different tenors of vol to see if what makes sense. Often into events the TS gets too backwardated and the opposite position is better.
Oct
5
awarded  Enthusiast
Nov
26
comment Implied Volatility for Asian option
Thanks for your quick response. I have tested Asians with local vol and find they price slightly higher than my semi-analyic model (~5bps for 1y monthly atm). As, you said, these things trade so tight that such a discrepancy would put you off market (assuming not just an implementation glitch in my lv). Risk representation coming from lv would then be another matter entirely.
Nov
26
comment When does delta hedging result in more risk?
Market makers who are dependent on the market moving in specific ways are probably very bad volatility traders. Exactly - by hedging your delta with the cash, you're basically taking on a naked cash position, and thus are more dependent on the market moving in a specific fashion. IMO, short dated wings are best left unhedged, or leaning your deltas strongly towards them.
Nov
26
comment When does delta hedging result in more risk?
I'm with @Strange on this one. In the above example of the 95 put expiring friday, if you hedge with underlying to be delta flat, you are implicitly long delta, no doubt about it. The option will bleed delta rapidly and you'll be left holding hard stock. Moreover, the premium of wings is very sticky - if the market ticks up or down, the premium ain't gonna move with the delta, meaning your PL is solely being driven by your cash position.
Nov
26
comment Implied Volatility for Asian option
Is local vol used in practice for Asian options? I was under the impression most dealers still used analytic approximations.