Understanding gamma – part 3

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…

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Understanding gamma – part 2

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…

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Understanding gamma – part 1

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. …

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Option risk management part 3: Delta hedging

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%…

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Option risk management part 2: Delta

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…

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Option risk management part 1

Intrinsic and time value Over the next few posts we will look at some aspects of option valuation and option Greeks.   This first post revisits a couple of valuation principles that are relevant to the…

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