44 lines
1.7 KiB
Plaintext
44 lines
1.7 KiB
Plaintext
880 Part VI: Measuring and Trading VolatiRty
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attempting to create a spread that is neutral with respect to both gamma and delta,
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he could attempt it in the following way:
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Example: XYZ is 60. A spreader wants to establish a spread that is neutral with
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respect to both gamma and delta, using the following prices:
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Option
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October 60 call
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October 70 call
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Delta
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0.60
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0.25
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Gamma
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0.050
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0.025
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The secret to determining a spread that is neutral with respect to both risk meas
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ures is to neutralize gamma first, for delta can always be neutralized by taking an off
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setting position in the underlying security, whether it be stock or futures. First, deter
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mine a gamma neutral spread by dividing the two gammas:
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Gamma neutral ratio= 0.050/0.025 = 2-to-l
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So, buying one October 60 and selling two October 70 calls would be a gamma
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neutral spread. Now, the position delta of that spread is computed:
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Position
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Long 1 October 60 call
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Short 2 October 70 calls
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Net position delta:
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Delta
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0.60
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0.25
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Position Delta
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+60 shares
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-50 shares
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+ 10 shares
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Hence, this gamma neutral ratio is making the position delta long by 10 shares
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of stock for each l-by-2 spread that is established. For example, if one bought 100
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October 60 calls and sold 200 October 70 calls, his position delta would be long 1,000
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shares.
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This position delta is easily neutralized by selling short 1,000 shares of the stock.
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The resulting position is both gamma neutral and delta neutral:
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Option Position Option Position
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Position Delta Delta Gamma Gamma
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Short 1,000 XYZ 1.00 -1,000 0 0
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Long 1 00 October 60 calls 0.60 +6,000 0.050 + 500
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Short 200 October 70 calls 0.25 -5,000 0.025 - 500
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Net Position: 0 0 |