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Is it better to gamma or vega hedge?

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The reason to hedge a trade is because you are trying to eliminate a risk and protect an edge. So you need to very carefully think about what you actually have an edge in. For example, option market makers almost always immediately hedge delta bec... read more

Hedging either gamma or vega just removes this edge. So I'm going to assume you are a pure market maker who doesn't have a edge apart from the bid ask spread and you want to best insulate yourself against volatility moves in general. In this case hedging based on either gamma or vega is far from optimal. read more

Gamma hedge is a second order hedge. Due to the non-linearity of option price vs underlying price, a delta-neutral portfolio will have gamma. To hedge off this gamma, you'll need to buy/short another traded option. After doing so, your delta will not be zero, and you'll have to buy/sell appropriate amount of the underlying to ensure delta-neutrality. read more

Figure 3 Option Greeks – Vega & Moneyness – Hedging higher order Greeks . The third catch is that both Gamma and Vega use exactly the same calculation function for Calls and Puts (Gamma for a call and put has the same value, Vega for a call and a put has the same value). read more

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Hedging Gamma & Vega
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