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Questions tagged [gamma]

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How to prove Gamma is the same for a European call and European put with the same inputs?

I saw from a text "From put-call parity, call and put with the same inputs have the same gamma", but I don't see how put-call parity is related to Gamma. Can someone explain? Thanks!
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How to compute gamma for at-the-money regular calls and puts when they approach expiration to avoid explosion of portfolio's gamma?

When and at-the-money regular call or put approaches expiration, gamma tends to infinity. However, for practical purposes, there is only a finite change in delta. The problem is that if any of the ...
510 views

Is short-gamma inherently a losing strategy?

With regards to a recent blowup of optionsellers.com - several analysts (specially on Quora) are blaming it on their strategy of being short gamma i.e. selling options. Is it correct to call short-...
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Delta-Gamma VaR question on inputs (do I need only one delta or the delta for the past 500 days?)

When calculating a VaR using the Delta-Gamma approach, I am supposed to use this formula: ∆(V) = Delta * ∆(X) + 0.5 * Gamma * ∆(X)² where: ∆(V) = change in value of the asset in portfolio ∆(X) = ...
531 views

Swaptions Gamma Interview Questions

A while ago, I interviewed for a trader role and was given the below assignment (I didn't get the job). I wanted to revisit the questions to learn from my mistakes and be better prepared next time. ...
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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, ...
395 views

Bucketed gamma for swaptions

For a long 7Y1Y payer swaption, I understand that the overall gamma will be positive. I see gamma to be positive in 7Y tenor and negative in 8Y - why would that be the case? Intuitively, how would ...
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Beginner question on Black Scholes

Would you please confirm whether my understanding is correct please? (Sorry a lot of questions...) 1) BS is derived based on the assumption that during an infinitesimal time, we can replicate the ...
5k views

Gamma Pnl vs Vega Pnl

Why does Gamma Pnl have exposure to realised volatility, but Vega Pnl only has exposure to implied volatility? I am confused as to why gamma pnl is affected (more) by IV and why vega pnl isnt affected ...
202 views

If you have a delta-hedged position and you're short gamma, why are spot price movements bad?

I simply can't wrap my head around the concept of Gamma. I've read multiple sites and explanations and for some reason can't wrap my head around the logic, so I feel that it'll really help for me to ...
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Gamma/delta dynamics in the Black Scholes model and it's relation to PnL (Basic of option theory)

If we are in a Black Scholes setup and a I have a Call option and hedged it by shorting delta amount of its underlying. What does the second derivative of the call with respect to Price of the ...
392 views

It is being said that in a long-gamma portfolio, you follow a buy-low sell-high strategy for the underlying stock, which causes you to make profit. The Theta for this portfolio is negative. But it is ...
321 views

construct an option portfolio on a single asset that is both Long Gamma and short vega

everyone, I have come across this question. How can we construct a portfolio that is both Long Gamma and short Vega and how do we actually hedge long Gamma/short vega position?
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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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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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Interpretation of an option gamma larger than one

I am working on an option hedging simulation. In this context, I wanted to expand the simulation to include gamma. For testing purposes, I used among others the natural gas futures. When I calculate ...
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American Options relation between greeks

Considering an American option in a Black-Scholes model, is there a relation between Vega and Gamma as it holds in the European case? I am aware an exact relation would be difficult to find. But in ...
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gamma-weighted SOIR

I came across a term 'gamma-weighted SOIR' several times recently. it seem like an old term on gamma imbalance. could someone care to explain what this is and the rationale behind it?
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What is the intuitive reason why the Gamma and the Theta tend to have the opposite sign?

Quoting Hull's book: When gamma is positive, theta tends to be negative. The portfolio declines in value if there is no change in S, but increases in value if there is a large positive or ...
1k views

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 ...
286 views

Gamma of a Lookback Option

From this book, http://docs.finance.free.fr/Options/Exotic_Options_Trading.pdf, it states that The gamma profile of a Max lookback option becomes intuitive when viewing it as a ladder option. ...
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What should $T$ be when gamma trading?

I am studying some gamma trading, and there's one thing I don't understand. On the option we are hedging, what should its expiry $T$ be, and for how long should we do the trade? What I mean is, is it ...
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How does gamma trading depend on $K$?

If we think realized vol > implied vol, then we might go ahead and delta hedge a call, hoping that profits from gamma outweigh the decay. Question: What should $K$ be on the call? ATM? If so, why? ...
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Proof of gamma profit formula

http://www.volcube.com/resources/options-articles/gamma-hedging-trading-strategies-part-i/ I would like to have proven to me the above formula, mostly because I don't quite understand it. The formula ...
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How do we know if the volatility which is quoted in market is Normal (Bachelier model) or log normal (Black 76)?

In markets, many instruments are quoted in volatility, but how we can tell what kind of volatility is this? Is it normal volatility, or lognormal volatility. because it affect our hedging positions. ...
732 views

How frequently do traders rebalance their gamma hedges?

Say, for instance, that you've set up a delta-neutral straddle (i.e. you are long volatility, short time decay) and want to dynamically hedge your gamma in order to offset losses due to theta. Is ...
69 views

Stress Test for gamma FX portfolios?

How can I create scenarios to stress gamma FX portfolios? If I shock the underlying for example +/-10%, then I gain in both scenarios. I get to capture some losses if I shock the implied volatility. ...
6k views

Gamma vs. Volatility Risk

Original Question: What is the link between Gamma and the Volatility Risk? It leads me to ask: - What is the Volatility Risk definition and what are the good practices to measure it? Thinking about ...
1k views

Vega and Gamma signs

Do vega and gamma always have the same sign (ie both positive or both negative)? Under what circumstances can they have opposite signs?
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Using limit orders or stop orders and gamma

From Dynamic Hedging by Taleb: Risk Management Rule: Option trader lore states that when long gamma, use limit orders. When short gamma, use stop orders. I cannot understand why this is and the ...
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"The vega is the integral of the gamma profits ( ie expected gamma rebalancing P/L) over the duration of the option at one volatility minus the same integral at a different volatility...Mathematically,...
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Known future volatility and difficulty in predicting final P/L

I have started Chapter 1 of Dynamic Hedging by Taleb and it starts by saying "Even if traders knew the exact future volatility but hedged themselves (rebalanced the gamma) at discretely spaced ...
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Is there any gamma in basis (i.e., floating for floating) interest rates swaps?

It is well known that vanilla fixed for floating swaps usually have a bit of gamma, but does a floating for floating (basis) swap have any? For the sake of simplicity, let's assume that both legs of ...
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Approximation of an option price

The value of an option in the money is 11.50 Euros. The parameters of the market are: -The price of the underlying stock: 81.4 Euros. -The volatility ofthe underlying is : 34.65 % The ...
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Estimating profit/loss of a Gold Futures option using Theta and Gamma

HELP! I am trying to find how much the underlying price of a gold futures option must move in order to breakeven on owning an option for a day. I was hoping someone versed in pricing options could ...
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We use full valuation of derivatives portfolios using scenarios from historical data. For simple contracts, this is relatively fast. For contracts requiring monte carlo simulation, this becomes ...
3k views

VaR calculation methods of options

I am a little bit confused about VaR in Options and I need a clarification for. I collected the following formulas, can you suggest what is the best formula and explain me why, please?
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is there an analytical proof that vega-neutral also provides (gamma & theta) neutral?

I've read an answer here that say if your security has vega, then it has gamma and theta. is there an analytical proof that vega-neutral also provides (gamma & theta) neutral?