What Is Gamma hedged?
Gamma hedging in quantitative finance is a more advanced risk management technique used in options trading to mitigate the risk associated with changes in delta. It’s essentially hedging the change in the hedge itself.
Gamma measures the rate of change of delta for every one-point move in the underlying asset’s price.
In simpler terms, it tells you how much the delta of an option is expected to change as the price of the underlying cryptocurrency moves. A high gamma means the delta is very sensitive to price changes, requiring more frequent adjustments to your delta hedge.
Benefits of gamma hedging include:
Reduce Gamma Risk: Delta hedging only neutralizes the first-order risk (delta). Gamma hedging aims to reduce the second-order risk, which is the risk that delta changes significantly, making your initial delta hedge less effective.
Maintain Delta-Neutral Position: Gamma hedging helps maintain a delta-neutral position, especially in volatile markets where prices can move rapidly.
Improve Hedging Accuracy: By accounting for changes in delta, gamma hedging provides a more precise and dynamic hedge.
How build gamma hedged position:
Options with Opposite Gamma: To gamma hedge, traders typically use options with opposite gamma to their existing position. For example, if you have a long call option with positive gamma, you might buy a short call option with negative gamma to offset it.
Adjusting the Underlying: In some cases, gamma hedging can also involve adjusting the position in the underlying cryptocurrency to counteract the gamma risk.
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