Review Option Greeks Primer – Sign up deadline this weekend Option Greeks Primer will be published by Palgrave Macmillan in Q3 of 2014. The book is aimed at bridging the gap that exists in Greeks coverage in academic and practitioner literature. Twenty years ago when I went looking for material on convexity most books on Fixed Income Portfolio [...]
What makes a book? There is so much more that goes in shipping a book to the publisher than just writing it. Two days ago when I shipped the final manuscript to my editorial team, it felt like a time to celebrate and we did. A private sushi dinner and the Edge of Tomorrow provided welcome relief [...]
Vega, Volga and Vanna. The volatility Greeks. What is Vega? Vega is the change in the value of the option with respect to change in volatility. Within the Greeks Vega’s importance rises given how misunderstood the behaviour of volatility is and the impact changes in volatility have on option prices. In earlier chapters we have seen: a) [...]
Gamma correction & Delta hedging P&L results. A simple case study Theoretically speaking in the Black Scholes world the cost of the hedge should be close to the theoretical value of the option. In our cash accounting P&L we have included the theoretical premium received which is used in determining the initial amount to be borrowed. [...]
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 [...]