Definition An interest rate cap is an option structure whereby the buyer is protected against rates rising above a pre-agreed level – the option’s strike. A floor gives the buyer protection against rates falling below…
Introduction In some previous posts I had explained the concept of delta and gamma within an option trading context. One of the strategies we analyzed was a delta-hedged short call position. This position has characteristics…
This is the fourth post in a series looking at elements of option trading and option risk management. In the earlier posts (part 1, part 2, part 3) on this subject we defined gamma as…
In the previous posts we had looked at a delta hedged short call position, which we argued was a way of expressing a view on ‘large’ movements in spot and changes in implied volatility. Here…
Gamma is defined as the rate of change of delta with respect to a given change in the underlying price. In the last post we looked at delta hedging a short call position and looked…
Introduction Over the last few posts we have spent a fair amount of time looking at delta as a measure of directional price risk. Arguably, the more difficult concept to grasp is that of gamma. …
In the previous post we looked at the payoff that combined a short call position with a delta hedge such that the trader was immune from small changes in the underlying price. This is shown…
In the previous post we had sold 100 ATM call options on Tesla and hedged the delta exposure by purchasing 56 shares. Using a simple example, we illustrated that the position was immune from small…
Let’s start with a quick recap of a couple of key concepts. Suppose you have bought a 3 month ATM option on Tesla struck at a price of $1,000. With an implied volatility of 60%…
Delta Does anyone remember graph paper? I recall as a 14 year old sitting in a maths class being asked to draw tangents to curves. I never really got the point until I started looking…