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
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
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
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.
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