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I have developed a keen interest in volatility strategies and have implemented various approaches based on practitioner delta. This delta is meticulously calibrated using a no-arbitrage implied volatility smoothing technique. While navigating this exciting domain, I have encountered a common challenge: how to effectively hedge against seemingly unhedgeable jump risks.

In my quest for understanding, I delved into literature, including Emanuel Derman's The Volatility Smile, Gatheral J.'s The Volatility Surface: A Practitioner's Guide, and the insightful work of Hyungsok Ahn and Paul Wilmott titled A Note on Hedging: Restricted but Optimal Delta Hedging, Mean, Variance, Jumps, Stochastic Volatility, and Costs.

The intriguing aspect of this exploration is the divergence of perspectives. Some sources contend that jump risks are inherently resistant to risk diversification, posing a formidable challenge. Conversely, others advocate for the adoption of jump-diffusion models as a viable solution.

I am wondering how do institutions manage jump risks, particularly for those hedge funds that sell health-care-sector options? Any comments are highly welcome.

Much appreciated!

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  • $\begingroup$ Does this post address your question ? quant.stackexchange.com/questions/33284/… There is little you can do in practice to eliminate jump risk IMO, you may have to "live with it" $\endgroup$
    – nbbo2
    Commented Sep 21, 2023 at 10:45
  • $\begingroup$ @nbbo2, Thank you very much for your response. This addresses my question mostly like diversification and increasing rehedging frequency may help reduce non-systematic jump risks. I remain intrigued by how healthcare option writers manage this challenge, given the higher frequency and magnitude of jumps compared to other sectors. It seems that for retail hedgers, a prudent approach might involve closing positions before significant upcoming events, such as clinical trials and earnings announcements. $\endgroup$
    – Frank
    Commented Sep 21, 2023 at 18:05

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