I am using finite difference on Kirk's Approximation for Spread Options to estimate greeks of the Spread Option. Now this is creating an problem in the estimation of gamma. For at the money options (with delta between 0.45 to 0.6) I am getting Gamma values in the range of 4-8 (implying a 400%-800% change in delta).

I know gamma can go to infinity but in practicality I am getting huge gamma exposures (gamma * quantity). And this to me and the traders look incorrect.

I am desperately seeking some suggestion.

  • 1
    $\begingroup$ The context is not clear. Specifically, what is the Kirk spread approximation used for? What are the product payoff and the underlying dynamics? $\endgroup$
    – Gordon
    May 9, 2019 at 14:44
  • $\begingroup$ Hi Gordon the Kirk Spread approximation is used to value spread options. So we are valuing a commodity spread option between gas and power $\endgroup$
    – Aditya
    May 10, 2019 at 6:10
  • $\begingroup$ What are all the values going in? If your spread is v. Small then your gamma could be relative to that rather than to the individual underlyings, in which case you may expect to see comparatively massive delta & gamma. $\endgroup$
    – will
    May 10, 2019 at 7:45
  • $\begingroup$ Also, using an approximation to price spread options between gas and power, in my opinion, is extremely risky. Both of these markets have pretty major deviations from the various approximations used in the approximation, so if you're using it for anything other than interpolating between prices you already have, I'd be very wary. $\endgroup$
    – will
    May 10, 2019 at 7:47


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