Calculating Shadow Gamma (Option Greeks) We use a simple example to illustrate the calculation of Shadow Gamma as describe by Taleb in Dynamic Hedging. Gamma is the second derivative of the change in option price to a change in the underlying asset price. Alternatively, it is the rate of change in the option delta to a change [...]
Building an illustrative Vega and Gamma hedging model in Excel. We build a simple Excel spreadsheet that allows us to hedge Gamma and Vega exposure for a single short position in a call option contract. Gamma and Vega hedges are created by buying cheaper out of money options with shorter or similar maturities. The five lessons [...]
Hedging portfolio Vega and Gamma using solver. Lesson Five For our portfolio model we need an objective function that allows us to minimize the cumulative Greek gap across maturity buckets with respect to Vega and Gamma between the short positions and the proposed hedge portfolio. We will try two alternates. In the first instance we calculate cumulative [...]
Lesson Four – Hedging higher order Greeks for a book of short call options We are now ready to move to a more sophisticated version of our hedging higher order Greeks problem. Rather than limiting ourselves to a single short position we are going to go ahead and sell multiple options. Here is an inventory of [...]
Hedging Higher order Greeks – Lesson Three We are now ready to solve the Gamma Vega hedging optimization model in Excel created in our first two lessons earlier. For a quick review see: Lesson One – Introduction Lesson Two – Setting up the Solver Model When we press the solve button on the Excel Solver add-in what does the [...]
Hedging Higher Order Greeks using Excel – Building the Solver model Our first attempt to hedge higher order Greeks is a simple illustrative scenario with a single option contract. (read: don’t try this back at your desk without supervision if you value your sales and trading job). We start off where we stopped in lesson one on [...]
Hedging Higher Order Greeks Since a spot, forward or future position is linear in its pay off it has no second order derivative. Options on the other hand are non-linear (asymmetric payoffs). While we can get away with hedging Delta with a linear position because Delta is a linear approximation (a tangent used to estimate the [...]