In this case, once we evaluate vol in smaller thirty min increments, we are able to see it's significantly diverse than vol calculated on close to shut rates. Both of those traders purchase the straddle on a one vol for example, who do you believe can be superior off? The one that hedges numerous situations each day or the one who hedges at the time at the end of the working day? In this case, the stock is not really doing at some consistent vol in any respect times in time over the length of your lifetime of the option and during on a daily basis, as a substitute we can begin to see the intraday vol is drastically diverse which the day-to-day shut to shut vol.
Envision that this trade is actually a CFD or perhaps a forex with USDEUR. I utilize a leverage of 50 for obtain. How must I involve this leverage in my PnL calculations?
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Therefore if I invest in an alternative and delta hedge then I earn cash on gamma but get rid of here on theta and both of these offset one another. Then how do I recover option rate from delta hedging i.e. should not my pnl be equal to the option value paid?
$begingroup$ I'm undecided Whatever you signify by "cross" results - the only correlation is they equally are features on the alter in fundamental ($Delta S$)
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– Will Commented Nov 24, 2024 at 22:15 $begingroup$ I'm not an accountant but I feel that these queries have additional to do with conventions and getting constant in order to convey to if, say, final yr's PnL was better or worse than this yr's. There is most likely no scientific strategy to derive a "appropriate" strategy.
$begingroup$ In Black Scholes framework, assuming zero interest charges and realized volatility to be very same as implied volatility, gamma pnl is precisely exact same and opposite of theta pnl.
Evaluate the delta neutral portfolio $Pi=C-frac partial C partial S S$. Assuming the interest price and volatility are usually not transform in the course of the modest time period $Delta t$. The P$&$L of the portfolio is supplied by
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So How can delta-hedging frequency just impact the smoothness and variance of PnL if we could clearly see it impacts PnL by itself in this instance?
PnL unexplained is actually a vital metric that regulators and product or service Manage inside a lender alike pay attention to.