Search results
Results From The WOW.Com Content Network
A related term, delta hedging, is the process of setting or keeping a portfolio as close to delta-neutral as possible. In practice, maintaining a zero delta is very complex because there are risks associated with re-hedging on large movements in the underlying stock's price, and research indicates portfolios tend to have lower cash flows if re ...
Examples of neutral strategies are: Guts - buy (long gut) or sell (short gut) a pair of ITM (in the money) put and call (compared to a strangle where OTM puts and calls are traded). Butterfly - a neutral option strategy combining bull and bear spreads. Long butterfly spreads use four option contracts with the same expiration but three different ...
Profit diagram of a box spread. It is a combination of positions with a riskless payoff. In options trading, a box spread is a combination of positions that has a certain (i.e., riskless) payoff, considered to be simply "delta neutral interest rate position".
The main principle behind the model is to hedge the option by buying and selling the underlying asset in a specific way to eliminate risk. This type of hedging is called "continuously revised delta hedging" and is the basis of more complicated hedging strategies such as those used by investment banks and hedge funds.
(Note that the alternative valuation approach, arbitrage-free pricing, yields identical results; see “delta-hedging”.) This result is the "Binomial Value". It represents the fair price of the derivative at a particular point in time (i.e. at each node), given the evolution in the price of the underlying to that point.
A delta one product is a derivative with a linear, symmetric payoff profile. That is, a derivative that is not an option or a product with embedded options. Examples of delta one products are Exchange-traded funds, equity swaps, custom baskets, linear certificates, futures, forwards, exchange-traded notes, trackers, and Forward rate agreements.
This is true because put-call parity posits a risk neutral equivalence relationship between a call, a put and some amount of the underlying. Therefore, being long a delta-hedged call results in the same returns as being long a delta-hedged put. Volatility arbitrage is not "true economic arbitrage" (in the sense of a risk-free profit opportunity).
The objective is to minimize risk due to the movement of the underlier's price, while implementing whatever strategy led to the sale of the options in the first place. For instance, a seller of a call may hedge by buying just enough of the underlier to create a delta neutral portfolio. As time passes, the option seller adjusts his hedge ...