Timeline for No expected return in Black Scholes formula: But how about the gamma?
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| Jan 12, 2023 at 16:24 | comment | added | dm63 | I think he also means that wherever you are relative to the strike , theta p/l will theoretically offset gamma hedging costs. So if you are short an option, and it goes near the strike , theta that you are earning increases. | |
| Dec 13, 2022 at 15:11 | comment | added | equis | Thanks @Bennn. When you say "hedging error equal to expected profits" I assume you mean that the option premium must be equal to the expected gamma PNL? Then I would agree with that statement. // That's right, would be similar for 1 year maturity and $110 strike. // The higher hedging cost in Scenario 2 is coming from the fact that due to the 10% drift a lot more Brownian motion paths will hover around the strike price where the gamma is highest. Hedging costs are driven by cumulative realised gammma over time. | |
| S Dec 13, 2022 at 10:12 | review | First answers | |||
| Dec 13, 2022 at 17:42 | |||||
| S Dec 13, 2022 at 10:12 | history | answered | Bennnn | CC BY-SA 4.0 |