Chapter 17

Delta:

The delta of an option does not remain constant

Return of position on a delta-natural position should be the risk-free rate (at that instant)

Short position in a put option should be hedged with a short position in the underlying stock

When it becomes apparent that the option will be exercised, delta approaches one

When it becomes apparent that the option will not be exercised, delta approaches zero

As rebalancing takes place more frequently, the variation in the cost of hedging is reduced

Delta hedging aims to keep the value of the financial institution’s position as close to unchanged as

possible

Delta-hedging procedure creates the equivalent of a long position in the option synthetically

For a larger portfolio of options, delta hedging costs are more feasible. Only one trade in the

underlying asset is necessary to zero out delta for the whole portfolio

Theta:

In a delta-neutral portfolio theta is a proxy for gamma

Theta may be positive for in-the-money European put option on a non-dividend-paying stock, or

and in-the-money European call option on a currency with a very high interest rate

!
Gamma:

Gamma neutrality is only maintained if other variables don’t change

Short-life ATM options have very high gammas

Vega:

If vega is highly positive or highly negative, the portfolio’s value is very sensitive to small changes

in volatility

The underlying asset has zero vega

Vega calculated from a stochastic volatility model is very similar to the BSM vega

Whether to use an available option for vega or gamma hedging depends on time between hedge

rebalancing and the volatility of the volatility

Rho:

Extensions:
!