20 lines
1.3 KiB
Plaintext
20 lines
1.3 KiB
Plaintext
Smileys and Frowns
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The trade examples in this chapter have all involved just two components:
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calls and stock. We will explore delta-neutral strategies in other chapters
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that involve more moving parts. Regardless of the specific makeup of the
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position, the P&(L) of each individual leg is not of concern. It is the
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profitability of the position as a whole that matters. For example, after a
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volatile move in a stock occurs, a positive-gamma trader like Harry doesn’t
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care whether the calls or the stock made the profit on the move. The trader
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would monitor the net delta that was produced—positive or negative—and
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cover accordingly. The process is the same for a negative-gamma trader. In
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either case, it is gamma and delta that need to be monitored closely.
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Gamma can make or break a trade. P&(L) diagrams are helpful tools that
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offer a visual representation of the effect of gamma on a position. Many
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option-trading software applications offer P&(L) graphing applications to
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study the payoff of a position with the days to expiration as an adjustable
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variable to study the same trade over time.
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P&(L) diagrams for these delta-neutral positions before the options’
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expiration generally take one of two shapes: a smiley or a frown. The shape
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of the graph depends on whether the position gamma is positive or negative.
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Exhibit 13.3 shows a typical positive-gamma trade. |