892 Part VI: Measuring and Trading Volatility 
respect to more than one risk variable requires one to approach the problem as he 
did when the position was established: Neutralize the gamma first, and then use stock 
to adjust the delta. Note the difference between this approach and the one described 
in the previous paragraph. Here, we are trying to adjust gamma first, and will get to 
delta later. 
In order to add some positive gamma, one might want to buy back (cover) some 
of the January 70 calls that are currently short. Suppose that the decision is made to 
cover when XYZ reaches 65.50 in 14 days. From the graph above, one can see that 
the position would be approximately gamma short 700 shares at the time. Suppose 
that the gamma of the January 70 calls is 0.07. Then, one would have to cover 100 
January 70 calls to add 700 shares of positive gamma to the position, returning it to 
gamma neutral. This purchase would, of course, make the position delta long, so 
some stock would have to be sold short as well in order to make the position delta 
neutral once again. 
Thus, the procedure for follow-up action is somewhat similar to that for estab­
lishing the position: First, neutralize the gamma and then eliminate the resulting 
delta by using the common stock. The resulting profit graph will not be shown for 
this follow-up adjustment, since the process could go on and on. However, a few 
observations are pertinent. First, the purchase of calls to reduce the negative gamma 
hurts the original thesis of the position - to have negative vega and positive theta, if 
possible. Buying calls will add vega to and subtract theta from the position, which is 
not desirable. However, it is more desirable than letting losses build up in the posi­
tion as the stock continues to run to the upside. Second, one might choose to rerrwve 
the position if it is profitable. This might happen if the volatility did decrease as 
expected. Then, when the stock rallies, producing negative gamma, one might actu­
ally have a profit, because his assumption concerning volatility had been right. If he 
does not see much further potential gains from decreasing volatility, he might use the 
point at which negative gamma starts to build up as the exit point from his position. 
Third, one might choose to accept the acquired gamma risk. Rather than jeopardize 
his initial thesis, one may just want to adjust the delta and let the gamma build up. 
This is no longer a neutral strategy, but one may have reasons for approaching the 
position this way. At least he has calculated the risk and is aware of it. If he chooses 
to accept it rather than eliminate it, that is his decision. 
Finally, it is obvious that the process is dynamic. As factors change (stock price, 
volatility, time), the position itself changes and the strategist is presented with new 
choices. There is no absolutely correct adjustment. The process is more of an art than 
a science at times. Moreover, the strategist should continue to recalculate these prof­
it pictures and risk measures as the stock moves and time passes, or if there is a