THETA NEUTRAL GAMMA HEDGING

Project: Externally funded project

Project Details

Description

This project is set up to evaluate, firstly, whether there are any mispricing in volatility between options with the German stock market index (DAX) as the underlying asset, and options with a number of large and liquid German stocks as the underlying asset. Secondly, we are interested in whether any documented mispricing creates exploitable trading rules for an option trader. In order to focus on the volatility, we isolate "gamma" in this strategy by making the position both delta and theta neutral. The results indicate that the gamma is too cheap in the index and too expensive in the stocks. We use the relationship between the actual volatility in the index and the stocks to create a signal when to be gamma long in the index and gamma short in the stock and vice versa.
StatusFinished
Effective start/end date01.01.199831.12.2000