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Delta
Delta (D) is the rate of change of the option price with
respect to the underlying. Thus, it is the first derivative of
the option value with respect to the spot price.
An Option Delta of 0.6 says that when the price of the stock
increases by Re.1, the price of option would increase by 0.6.
Option
price
Slope = D
B
A
Stock price
Delta Hedging
Gamma
Gamma Hedging
Since the delta of the stock is 1, its Gamma (G) is always zero.
So the same stock cannot be used to make the portfolio gamma
neutral.
Gamma can be changed by adding such instruments like other
options whose value is not linearly related to the underlying.
Gamma neutrality, just like delta neutrality is only for a short
period. However, delta neutrality provides protection against
relatively small movements in the underlying, whereas gamma
neutrality provides protection against relatively large
movements in the underlying.
High gamma value would call for frequent rebalancing.
Vega
Vega Hedging
Theta
Rho
Rho is the rate of change of the value of a
derivative with respect to the interest rate.
Hedging in Practice