Definition
Gamma hedging is a strategy used by investors to reduce the risk associated with changes in the price of an underlying asset. It involves adjusting the delta of a portfolio of options to maintain a desired delta-neutral position. The goal of gamma hedging is to reduce the risk of large losses due to sudden changes in the price of the underlying asset.
Importance
Gamma hedging is an important risk management tool for investors who hold a portfolio of options. By adjusting the delta of the portfolio, investors can reduce the risk of large losses due to sudden changes in the price of the underlying asset. This can help investors protect their profits and limit their losses.
Example
For example, an investor holds a portfolio of call options with a delta of 0.5. If the price of the underlying asset increases by 10%, the delta of the portfolio will increase to 0.6. To maintain a delta-neutral position, the investor can sell additional call options to reduce the delta of the portfolio back to 0.5. This is an example of gamma hedging.
Table
Delta Before After
0.5 0.5 0.6
Key Takeaways
- Gamma hedging is a risk management strategy used by investors to reduce the risk associated with changes in the price of an underlying asset.
- The goal of gamma hedging is to reduce the risk of large losses due to sudden changes in the price of the underlying asset.
- Gamma hedging involves adjusting the delta of a portfolio of options to maintain a desired delta-neutral position.
- An example of gamma hedging is selling additional call options to reduce the delta of a portfolio back to a desired level.
Conclusion
Gamma hedging is an important risk management tool for investors who hold a portfolio of options. By adjusting the delta of the portfolio, investors can reduce the risk of large losses due to sudden changes in the price of the underlying asset. This can help investors protect their profits and limit their losses.
