Financial Information Management Gamma Hedging Wilhelm's Warriors No Hedgetation The Gobs of Money Machine The Ira Harris Experience

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Financial Information Management Hedging Gamma, Vega, Theta & Rho

Gamma  Delta (  ) measures the change in portfolio value as the underlier’s price S changes (~speed).  Gamma (  ) measures the rate of change in portfolio value as S changes (~acceleration).

Meaning of Gamma Gamma is small  If Gamma is small (abs.), small changes in S will not affect much Delta (and your portfolio value), so there is less need to take immediate rebalancing action. Gamma is large  If Gamma is large, small changes in S will affect Delta (and your portfolio value) significantly, so there is a stronger need to take immediate rebalancing action.

Using Gamma  During small periods of time t 2 -t 1  Portfolio = ½   (S 2 -S 1 ) 2 Example: If you do not rebalance and the underlier price drops from $52 to $50, the change of value in a Delta-Neutral Portfolio is approximately = ½   (S 2 -S 1 ) 2 = 0.5 * (-10,000) * (52-50) 2 = -$20,000 ~

How to Calculate Gamma  Gamma = N’(d1) S  t  N’(d1) = e –(d1) 2 /2  (2  )  d1 as in Black Scholes Strike Stock price S Gamma

Gamma-Neutral Portfolio  More stable than a delta neutral-only.  Cannot use the stock to reach Gamma neutrality because the stock has Gamma = 0 1)  portfolio <> 0 2)  portfolio +  x qty x = 0 3) qty x = -  portfolio /  x  Warning: Acquiring qty x will disturb Delta neutrality. You will need to rebalance.

Delta Gamma Delta It’s a strategy, not a sorority.  Find out what to acquire to achieve Delta neutrality.  Find out what to acquire to achieve Gamma neutrality.  Find out what to acquire to re-achieve Delta neutrality. Stock is ideal because it will not affect Gamma.

More Dark Horses  Simultaneous Delta Gamma  Conditional Gamma  Extreme transaction costs minimization Come and see me – not on the last day!

Theta, Vega, and Rho Conceptually similar to Delta  Theta = change in portfolio value when time changes  Vega = change in portfolio value when the volatility changes  Rho = change in portfolio value when the rate of interest changes

Financial Information Management WINIT What Is New In Technology?

Financial Information Management Homework Spartan Trader

Your Opinion Matters  Name  A couple of things that you are learning from the class  Things that you like/that can be improved  Is the class getting you to think on your own?  Concerns about the HT