Questions tagged [delta-hedging]

The tag has no usage guidance.

Filter by
Sorted by
Tagged with
2
votes
0answers
35 views

Delta Hedging Example

I was reading Dynamic Hedging by N. Taleb and in the chapter dedicated to the delta, there is this example of a trader position in options (one-month European call, flat yield curve, forward is ...
3
votes
1answer
83 views

FX option trading questions

Are all FX trades ( RR, BF, ATM)quoted in implied vol term delta neutral trades? If trades are not delta neutral at the initiation does that mean it is speculative trading? Why/ why not?
1
vote
0answers
49 views

FX option trading [duplicate]

Are all trades quoted in implied vol terms delta neutral trades? If trades are not delta neutral at the initiation does that mean it is speculative trading? Why/ why not?
1
vote
1answer
38 views

European Call option replication

An asset $S_t$ is evolving according to the Black-Scholes model. We want to replicate a call option on this asset by holding Delta units of the asset at every time. I use a Monte Carlo algorithm to ...
1
vote
1answer
75 views

Delta hedging: theoretical value vs actual price

One way to derive the Black-Scholes PDE is via the Delta-hedging argument: Suppose that $V_t = V(t, S_t)$, for some function $V: [0,T] \times \mathbb{R} \to \mathbb{R}$. We construct a portfolio by ...
1
vote
0answers
44 views

Simple 3 way delta hedge

Consider 3 futures contracts: A BTC/ETH, settled in BTC B USD/ETH, settled in ETH C USD/BTC, settled in BTC As the markets aren't efficient, sometimes these ...
1
vote
0answers
40 views

Optimal Hedging of Options - asymmetry between long and short vol positions

Going over Zakamouline's Approximation method for optimal delta hedging of options, it is claimed that the result remains valid for both buying options (long vol positions) or selling options (short ...
0
votes
1answer
57 views

In literature, is IV constantly adjusted during option delta hedging?

In a lot of literature, they like to compare the performance of buying an option, and then delta hedging either at that options implied volatility (IV) or the true future volatility. This is under ...
4
votes
2answers
5k views

Delta Neutral / Gamma Neutral Positions

I've been trying to find out more about options positions which are both delta neutral and gamma neutral--created with some kind of calendar spread. Supposedly, such a trade will be perfectly hedged ...
1
vote
0answers
52 views

Gamma PnL Formula and Break-Even volatility

When we derive the P&L of a delta hedged option we obtain: $$ \text{P&L}=\dfrac{1}{2}\Gamma(\delta S)^{2}-\theta\delta t $$ and setting equal to zero and rearranging we obtain: $$ \dfrac{1}{...
1
vote
0answers
58 views

Variance swap = delta hedged strip of options

Is there a paper that explicitly shows/demonstrates that a variance swap can be replicated by delta-hedging a strip of options? Thus far I have not found anything: papers mention it in passing ...
1
vote
1answer
148 views

How is FX cross rates options are priced?

Say I have market for EUR/USD and also USD/CAD, how would EUR/CAD would be priced and hedged in practice? What are good papers/book chapters to read on that? (Assuming basic knowledge already on ...
4
votes
2answers
267 views

Expected value of delta-hedged portfolio

Consider portfolio in black-scholes world $\Pi = \Delta S - V$, where $S$ is the stock price and V is the price of the option. I have read that if we set $\Delta = \frac{\partial V}{\partial S} $ ...
1
vote
0answers
58 views

FX Spot Delta market standard calculation (Trader View)

I am just writing my thesis about FX instrument and hedging and one question popped up which I can't solve. Maybe it is silly but cant find anything about it how the delta of a fx spot is defined and ...
1
vote
3answers
228 views

Heging against stochastic interest rate

I am working on an Index and I am trying to price Call options on it. I work with the 3 Months LIBOR as Cash. I use the following Black-Scholes formula $$C_{t} = S_{t}e^{-q_{t}(T-t)}\mbox{N}[d_{1}(t)]...
11
votes
4answers
11k views

Delta of binary option

What is the Delta of an at-the-money binary option with a payo out $0$ at $<100$ dollars, and payout $1$ at $>100$ dollars, as it approaches expiry? This is from a sample interview exam. I ...
0
votes
1answer
80 views

Market Maker ETF Hedging Strategy

Some thoughts about ETF hedging; feel free to leave comments! Scenario 1: An investor sells 1M ETF shares to a Market Maker(MM) at bid price. MM has a long position and will need to offload the ...
1
vote
1answer
96 views

Why does it make sense to delta hedge a deep OTM option given the very low delta exposure? [closed]

I am not sure if this is actually done in practice as I'm not a derivatives trader, but I can only think of reducing the cost of the OTM option as a reason for delta hedging a deep OTM option, which ...
1
vote
3answers
287 views

Options Delta Meaning of Term [closed]

not able to understand delta in options. Whilst I understand, it is how much the option moves when the underlying moves by 1 unit, I fail to understand, when someone books a currency option, why does ...
1
vote
0answers
46 views

Books and techniques to hedge options that expire tomorrow?

Can anyone point me to books or resources that talk about best techniques to hedge ATM or close to ATM options that expire tomorrow. I am particularly interested on how to hedge if you are short the ...
8
votes
3answers
3k views

What really is Gamma scalping?

How does Gamma scalping really work? It seems there is no true profit scalped. If we look at the simplest scenario, Black-Scholes option price $V(t,S)$ at time $t$ and the underlying stock price at $S$...
1
vote
0answers
66 views

transactions costs and leland modified volatility

When there are transactions costs, we are in a situation of incomplete market. What does the modified volatility of Leland (Option Pricing and Replication with Transactions Costs, 1985) bring us? can ...
0
votes
1answer
109 views

Delta hedging theta pnl

Say I sell a swaption and delta hedge it, and the breakeven daily move in the underlying is $x$ bps. Then if on any given day the actual move in the underlying is $y$ bps $( y <x)$. Then I, as ...
1
vote
0answers
46 views

How should one hedge option positions on the date of expiry?

Let's say we are looking at a non-liquid equity ticker and a slightly OOM option on it. The problem is that if we buy delta to hedge it, it could move the underlying market and push the option to be ...
1
vote
3answers
133 views

Delta hedging pnl to recover option price

In Black Scholes framework, assuming zero interest rates and realized volatility to be same as implied volatility, gamma pnl is exactly same and opposite of theta pnl. So if I buy an option and delta ...
0
votes
0answers
38 views

Understanding delta based strike selection in an Iron Condor

I am reading a small book on the proper use of Iron Condors (link). I do not use these strategies as I have had a very hard time being profitable on them. This book mentions some strategies to ...
1
vote
0answers
155 views

Implied volatility as break-even delta hedge volatility

There have been some posts on this topic, but not what I am looking for, so a new post on an old topic.. I think some/most of us here are familiar with the following formula expressing implied ...
3
votes
2answers
203 views

When should we delta hedge?

Let's say I'm the seller of a European call option on a non-dividend paying stock. I pocket the premium $c_0$ of the call at $t=0$. If I start to delta-hedge right away, this is equivalent to ...
2
votes
1answer
183 views

Profit and Loss on delta-hedged portfolio

The overnight profit formula from a textbook (possibly Derivative Markets by McDonald) is the following: $$\Delta _{t}(S_{t+h}-S_{t})-(V_{t+h}-V_{t})-(e^{rh}-1)(\Delta_{t}S_{t}-V_{t}),$$ where Delta ...
3
votes
0answers
91 views

Uniqueness of the Hedging strategy

I am currently reading the book "Nonlinear Option Pricing" by Julien Guyon. In the book they defined an attainable payoff $F_T$ as a $\mathcal{F}_T$ measurable random variable for which there exists ...
1
vote
0answers
78 views

Break-even volatility for delta hedge portfolio

After simulating practical and theoretical PnL of a delta hedged portfolio on some data from the SPX500 under 0.15 management Vol I want to find the Vol which gives me an accumulated PnL of 0. ...
4
votes
1answer
194 views

Option order imbalance

Currently studying the paper: HU, Jianfeng. Does Option Trading Convey Stock Price Information?. (2014). Journal of Financial Economics. 111, (3), 625-645. Research Collection Lee Kong Chian School ...
14
votes
1answer
426 views

How to, from various hypotheses on the P&L, get known models (BS, Heston etc …)

Usually models in quantitative finance are taught by giving, let's say, stochastic differential equations, initial conditions, and then pricing, under the model, various derivatives written on the ...
1
vote
0answers
44 views

Correct beta weighted delta options formula?

Is this the correct formula for beta weighted delta: http://www.nishatrades.com/blog/beta-weighted-delta I've seen this What is the formula for beta weighted delta and gamma? but they seem to be ...
0
votes
0answers
69 views

replicate option by dynamic hedging

I've just started working for a company with a decent commodity exposure. They manage this by as they call it dynamically hedging it. Basically when they start the hedging they identify a market ...
1
vote
2answers
360 views

why gamma decreases when option is deep in the money? [closed]

Gamma decreases when a call option goes either deeper in, or deeper out of the money. That is due the demand for the call option. I can imagine the demand for the option would decrease as it goes ...
1
vote
1answer
203 views

Delta hedging/Gamma PnL

Suppose I am long USDIDR straddle with my start of the day delta being USD10m long IDR and USDIDR gamma being $5m. There is a 1% intra-day IDR strengthening, so my delta becomes roughly long IDR 15m....
2
votes
0answers
42 views

Confused by Solution to the Expected Profit when Hedging an option using Implied Volatility (from Wilmott 2006)

Paul Wilmott on Quantitative Finance 2nd Ed (section 12.5.1) gives a solution to the initial expected profit when hedging using delta based on implied volatility as $$\frac{1}{2}(σ^2 - σ̃^2) \,\int_{...
0
votes
2answers
458 views

Hedging with machine learning

I’ve been thinking about an interesting problem lately: Suppose I have a position in an exotic derivative. How can I automate the hedging process? Traditionally, one build a pricing model and ...
2
votes
3answers
448 views

Tracking error Black Scholes

Suppose an asset follows the SDE $$ d S_{t}^{1} = \mu S_{t}^{1} dt + \sigma_{t} S_{t}^{1} d W_{t} $$ Furthermore assume that $r = 0$ and a trader who uses Black-Scholes for pricing and hedging with ...
2
votes
0answers
58 views

Effect of mean reverting Volatality in Black and Scholes? [closed]

Can someone please elaborate what would be the effect of a mean reverting volatility (instead of a constant volatility) in pricing options using BS ? Also how would the greeks vary?
0
votes
1answer
124 views

How is the performance measure computed here?

The image is from John C Hull Textbook titled Options, Futures and Other Derivatives ( page 407 - Ninth Edition). The table above was obtained after computing the delta of stock price, shares ...
10
votes
3answers
3k views

Delta hedging frequency for plain vanilla European options under trading costs

I am looking for methods to select points in time when delta hedging plain vanilla European options under trading costs. It is easy to come up with ad hoc ideas such as Time-based: for example at ...
1
vote
0answers
118 views

Can prediction of realized volatility for next day improve delta hedging (gamma scalping)?

Im quite confused. As I understand from standard delta PNL of option + underlying position, pnl is equals to difference between realized and implied vol weighted by gamma. However, as I understood, ...
0
votes
2answers
587 views

How does a Delta Hedged portfolio yield the Risk-free?

Here I'm considering the simple case of a dealer writing call options on a stock and hedging the short position with a "textbook" Delta Hedge, i.e. goes long on $N_c \times Delta$ stocks (where $N_c$ ...
2
votes
1answer
123 views

Why are vanilla OTC options are quoted in delta and vol?

Why do we quote options in delta bid-ask & volatility bid-ask & why not it is quoted in terms of option premium?
2
votes
1answer
55 views

duration hedging of illiquid bonds

Let's say that I have a totally illiquid 30Y bond that I want to hedge with short-dated bonds and that the market is liquid up to 10Y bonds. After 20 years, my 30Y bond will become a 10Y bond so I'll ...
4
votes
1answer
93 views

Using BS Delta to hedge in a LV Model

Why do some people use a Black Scholes Delta instead of the delta given by the Local Volatility model?
1
vote
0answers
79 views

Delta hedge a long option using a short option [closed]

If I long a call option of 1 mio USD/SGD for example, I understand that at strike price (ATM), delta is approximately +0.5. To approximately hedge this delta, I also understand we can short 0.5 mio ...