From CFAI V5 PP 468 “When gammas are large, some delta hedgers choose to also gamma hedge. This somewhat advanced strategy requires adding a position in another option, combining the underlying and the two options in such a manner that the delta is zero and the gamm is zero. Becuase it is somewhat advanced we do not cover the details here.” If it is just one more option position then why not just tell us?! Anyone know what this is? Buying the put as well so youve got P-C parity? e.g you would end up with -C = P + S
You could buy or sell delta-neutral straddles/strangles. Otherwise, you could trade the option first - for instance, if you want to hedge a long gamma position, sell a call (not delta neutral), and hedge the call delta with stock or futures. The first way tends to be more stable though.
Hello Mister Walrus Wrote: ------------------------------------------------------- > You could buy or sell delta-neutral > straddles/strangles. Otherwise, you could trade > the option first - for instance, if you want to > hedge a long gamma position, sell a call (not > delta neutral), and hedge the call delta with > stock or futures. The first way tends to be more > stable though. I like your explanation. Though you would most likely try to hedge short gamma in real life.
“Though you would most likely try to hedge short gamma in real life.” That’s true.
the example is for heding a short call…if you buy the same call back of course you have no gamma but you also have no position 
algo-rhythm Wrote: ------------------------------------------------------- > the example is for heding a short call…if you > buy the same call back of course you have no gamma > but you also have no position As Hello_Mister_Walrus explained here is the strategy. Let’s assume you sold 100 calls with delta of 10 and certain gamma. After you buy 10 underlyings, you are delta-neutral. Then you can hedge gamma by buying strangles or straddles.
Also, it doesn’t have to be the same call option. If you have 100 positions in various calls/puts/etc. on the same underlier, you will have aggregate gamma and delta positions, in addition to vega, rho, bla bla bla… You can selectively buy/sell gamma/vega/rho, etc. to hedge any of these exposures.
Im familiar with how you hedge greeks en aggregate. What I am curious about is the strategy CFAI mentions which includes TWO option positions. If you are short a call and then buy a straddle or a strangle then you have 3 positions on. “combining the underlying and the two options” Or maybe this means combining the underlying and two additional options ?? E.g. short one call, long one stradle??
Already mentioned this: “trade the option first - for instance, if you want to hedge a long gamma position, sell a call (not delta neutral), and hedge the call delta with stock or futures.” In other words, solve for the position that gives you zero gamma without considering delta. Then, use something with delta exposure and no gamma exposure (like stock) to hedge the delta. Furthermore, CFAI is retarded. You shouldn’t think too much about things that they are say are too “advanced” for them to write about.
Just remember that the aggregate of the greeks are the way to view a whole portfolio of options positions once, don’t think about 5, 6, 7 positions. Its the portfolio greeks you want to look at. When you sell some calls, buy a straddle, maybe do a butterfly against all that. you have a net underlying position. The greeks are how you view this. Key points, to hedge gamma and and importantly - vega. You want to take offseting positions in other options. Vega is a huge componet of option price. When you buy an option. you are long both gamma and vega. When you sell an option. you are short both gamma and vega. Make sense?
Yes…I just dont like it when CFAI mention something without specifying what it is