Questions tagged [delta-hedging]
The delta-hedging tag has no usage guidance.
61
questions with no upvoted or accepted answers
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Gamma Imbalance / Exposure
I am currently writing my thesis about the lack of volatility / changing market structure we see nowadays on the financial market. I believe an important factor in this development is the delta-...
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Delta-hedge experiment of American Put option
I am trying to run a delta-hedge experiment for an American Put option but there's a (systematic) hedge error which I cannot seem to understand or fix.
My implementation is found in the bottom of this ...
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Delta hedging the day before expiry
In practice, how do people usually delta hedge options the day before expiry? Would you still use the black Scholes delta and then close out the position in the underlying immediately after expiry? ...
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How often to tune the regularisation parameter in LASSO?
I'm trying to implement the following paper: Avellaneda & Lee (2010), Statistical Arbitrage in the US equities market.
To build the strategy, the idea is to trade a stock and hedge using a basket ...
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How does P&L of delta hedged option position accumulate over time?
Assume that I long ATM Call option on a stock at 20% implied volatility. This Call option will expire in 1 month. If, over this coming month, the underlying moves with 30% volatility and I delta-hedge ...
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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 ...
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Example of optimal delta hedging in G. Barles, H.M. Soner option pricing paper
There is a paper Option pricing with transaction costs and a nonlinear black-scholes equation by Guy Barles and Halil Mete Soner. And there is a section about optimal (delta) hedging, which I do not ...
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Exact delta-hedging for endogenous payoffs
I would like to derive the exact delta-hedging strategy in the Black-Scholes market to replicate the following non-standard endogenous payoff. The particularity is that the payoff does not only depend ...
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Delta hedge swaption straddle
Let's say you decide to buy a 2Y10Y ATM swaption straddle (i.e. buy 10 million ATM payer swaption and buy 10 million ATM receiver swaption).
In order to delta hedge, I believe you would short the ...
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Empircal data analysis delta hedge error of Black-Scholes by Mark Davis
Regarding Mark Davis derivation of the delta-hedging error occuring in the black-scholes as a result of difference in realized volatility and implied volatily. The formula reads as follows:
$$ Z_t = \...
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Delta Hedging Example
I was reading Dynamic Hedging by N. Taleb and in the chapter dedicated to the delta, there is this example of a trader position in options (one-month European call, flat yield curve, forward is ...
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Confused by Solution to the Expected Profit when Hedging an option using Implied Volatility (from Wilmott 2006)
Paul Wilmott on Quantitative Finance 2nd Ed (section 12.5.1) gives a solution to the initial expected profit when hedging using delta based on implied volatility as
$$\frac{1}{2}(σ^2 - σ̃^2) \,\int_{...
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Computing Malliavin Derivative for European Call Payoff
Let $X_t$ be a continuous local-martingale modeling the stock price given by
$$
X_t = \int_0^t \sigma_t(T,K)dW_t
,
$$
and $\sigma_t(T,K)$ is an $L^2$-measurable process not adapted to $W_t$'s ...
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Calculate latest underlying price (or option), given new option (or underlying) market price?
Given a reference underlying price, reference option price, delta and gamma, if I receive a new underlying/option price what equation should I use to calculate the respective option/underlying price (...
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Delta hedging vs Strangle
Long volatility delta hedging and strangle are common long volatility strategies. We can make strangle delta neutral(in $) by buying more puts than calls(if an absolute value of put delta is less than ...
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Short Call Hedge. Options and gamma trading
Let’s say a trader sells a Short Call with strike 100 (for making profit with the premium) at-the-money (for highest extrinsic value there). For hedging until expiration, he buys the underlying share ...
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Reference for delta hedging programmatically
I learned some of the basic theory of Bjork (chap 1-9)
and would now like to study some (discrete delta) hedging using programming software.
We had an exercise in school where we hedged a call ...
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339
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How to hedge a long stock with the corresponding volatility ETF
Let us say I want to establish a market neutral position. So if I buy 50 shares of stock (SPY) and I want to delta hedge, I sell an ATM covered call. So that brings the position delta to 0.
Now, I ...
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Zakamouline Optimal Hedging of Options with Transaction Costs
I've read that the Zakamouline method suggests the best optimal hedging of options when taking transaction costs into account. I've read the article but am having difficulty understanding it well ...
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How do banks and dealers effectively hedge a variance swap?
It is known that a variance swap can be replicated by a strip of options. However, it is costly to trade that many OTM options and there is not enough liquidity to trade the wings in the quantity that ...
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at what frequency do option market makers delta hedge
Could someone with option market making experience tell me usually at what frequency do the major option market makers delta-hedge their positions (say for US single stocks or equity indices)? ...
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Hedging or Relative Value Strategies with Rho or Tau Correlations?
I understand that the Pearson correlation indicates the strength of linear relationship between two data sets. The applicability of this to hedging strategies is intuitive: If I can establish a linear ...
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Sticky strike sticky delta implementation
I'm a clear on the differences between the two assumptions but a bit confused on the practical implementation.
1) The aim of choosing one of the two assumptions is to take into account the co-dynamic ...
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Hedged portfolio dynamics under T-forward measure
I'm looking to find the hedging PDE for a multi-currency derivative $u(F_d, F_f, X,t, T)$ under the T-forward measure, using the delta-hedging argument (F - forward rate, X - forward FX rate).
...
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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 ...
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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 ...
user34971
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0
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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 ...
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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 ...
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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 ...
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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.
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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 ...
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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 ...
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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, ...
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Risk management for Digital Option at large Bank
Say, an investment bank sell Digital Call Option to its client at strike 100.
But trader at the bank want to book the deal with a call spread at 99/100 (price&hedge Digital Option like price&...
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Using malliavin derivative to find the worst Delta-positive hedge?
Background:
I've heard that Malliavin Calculus can be used to show the explicit form of a delta-neutral hedge (given an SDE driven market model). For example, here is a sketch here on page 21 on how ...
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Straddle neutral strategy
What does it mean to implement a delta-neutral strategy for straddle ?
A straddle consists in buying a call and a put simultaneously, at the same date, on same underlying, with same maturity and ...
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Mock/practice trading for options (delta/gamma hedging etc.)
I know there are some sites for practicing equity investing. But could you provide me with suggestions concerning options trading etc. I read Natenbergs book on Options and want to test things like ...
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What would be the practitioner way of hedging jump risks?
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 ...
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Question regarding delta-hedging principle
A delta-hedging principle involves taking the opposite direction, i.e., short and long, to hedge against financial risk. An example is longing an option call and selling (shorting) the borrowed the ...
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Compute Forward Variance Swap
I'm trying to compute a forward variance like this paper https://arxiv.org/pdf/2105.04073.pdf.
The paper shows that under rough stochastic volatility model assumption, options can be hedged with the ...
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0
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Where am I going wrong with the calculation of conitnuous PnL from delta hedging?
I am trying to work out the PnL of continuous delta hedging. I saw This link to an answer here, however, I obtained a different answer without resorting to Black Scholes, which I will outline below.
...
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Is a volatility forecast essentially a delta forecast in vanilla European options?
As the title suggests.
I want to understand why delta hedging is done. I'd like to illustrate with an example:
Say you have 7 dte option chain with 15.8% IV ATM straddle on an underlying of spot 100.
...
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How to actually compute delta when delta hedging with a (time varying) volatility model?
I was reading some papers on delta hedging, many of which reference "Which Free Lunch Would You Like Today, Sir?" (Ahmad/Wilmott) which describes the following setup:
Quote option with $\...
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Does using borrowed capital make a Uniswap liquidity position hedged from impermanent loss
According to the following article, using borrowed capital can make a Uniswap position delta neutral.
https://lambert-guillaume.medium.com/how-to-deploy-delta-neutral-liquidity-in-uniswap-or-why-euler-...
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Representing a continuous time hedge discretely
I recently came across an example (Section 5.2.9 here) which does a simple delta hedging experiment. Below are the details:
Market conditions
Interest rates are at a 2% level --> r = 0.02
The ...
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How do you explain consistently making money with discrete hedging a call option?
In a backtest I did, I'm selling a call option and buying a delta amount of the underlying (calculated using implied vol). Now I know in the limit case of continuous hedging I end up paying a PnL ...
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black Scholes model hedging without constant volatility
I have started to look deeply in the hedging and I have created some simulations to simulate delta hedging strategies. I use BS model to calculate delta. The only issue was, which Volatility should I ...
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Option's Delta Investopedia Question
New to this. In this Investopedia article on Delta the following looks like a typo -
How Do Options Traders Use Delta?
Delta is used by options traders in several ways. First, it tells them their ...
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Option P&L over time
I would like to compute the evolution of the P&L of an FX plain vanilla option. Unfortunately, I am not sure about the correctness of my reasoning.
Let's imagine that I sell a 1W call option on a ...
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Does delta hedging mimic the disposition effect?
A friend of mine sent me a no-name paper on the disposition effect yesterday and asked for my opinion about it. Therein, the authors claim to have detected some evidence for a strong disposition ...
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