What is Delta Hedging || Dynamic Delta Hedging like a Quant || Profit & Loss Options Trading
Today we look at hedging options from a quant’s perspective. In this video we look at the difference in Profit and Loss (P&L) with three different strategies: dynamic delta hedging, static delta hedging and no delta hedging.
Delta hedging is a way to reduce directional risk of the underlying to your options positions by transacting in the money markets (bank account) and the underlying (stocks/futures/etfs/index). By continually adjusting in the underlying and bank account, we can effectively replicate the changes in payoff of the ‘new’ option contract. Essentially instead of betting on the direction at one time spot (on entry) we are now making a series of bets at different levels.
Hopefully in this video the importance and relevance of realized volatility becomes apparent and hence why market marking firms like Optiver are so keen on forecasting realized volatility as accurately as possible.
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00:00 Intro
00:22 What is Delta Hedging?
01:40 Importance of Realized Volatility
02:00 Real world examples
03:56 Full worked example: Short CBA Nov 102 Call
06:40 Looking at P&L over 1000 trades
07:45 P&L distributions for different hedging strategies
Introduction to financial markets and instruments - Kaggle edition:
Optiver Realized Volatility Kaggle Challenge:
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