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The other thing to keep in mind is that 100 different people can be trading the
same underlying and the same option and each person can have a different
valuation for that option at exactly the same time. Is one using a 10 day
volatility or 30 day volatility or one longer or shorter? Each can be using a
different interest rate, etc. Each of the variables can be different for each
purchaser or seller. And, yes, they can all make money if they trade
correctly. Ira.
Gitanshu Buch wrote:
> Pardon me for intruding on this exchange -
>
> >Mike, as I understand it, derivatives such as options find their
> precise equivalents (or can only be precisely hedged) by other
> derivatives, and stock by stock...the derivatives and the stocks are
> the different animals...correct me if I have this wrong.
>
> --
>
> The specific statement is wrong, because a derivative by definition derives
> its lifetime behavior courtesy the existence of the underlying asset
> (stocks, in this discussion) - and in addition to that influence from the
> underlying asset, derivatives have a set of properties/behaviors of their
> own that the underlying asset may or may not have (eg - "value",
> "volatility", "shelf life" etc).
>
> One can find precise equivalents of the derivative in
>
> - another derivative of the same underlying asset. or in
> - the underlying asset itself or in
> - a combination of both -
>
> as long as the person finding the equivalence understands that the
> equivalence exists as a snapshot of that timeframe alone - hence the need
> for dynamically taking snapshots and adjusting for the changed equivalents
> should the desire be to remain neutral on some/all parameters (price,
> capital exposure courtesy changes in "value", the evolving directional bias
> etc).
>
> Gitanshu
>
> > Option equivalents, by definition, require total equality with the
> original
> > position regardless of time, price, or volatility of the
> underlying. In
> > contrast, dynamic hedges are, of necessity, fleeting approximations
> to an
> > ever-changing reality, thus needing constant readjustment. For the
> latter
> > only, delta/gamma calculus is the right tool.
>
> > I would
> > simply add that if one wishes to remain fully hedged after buying
> > say, 10 ATM options and selling 500 shares of the underlying stock,
> > dynamic asset replication is necessary. That would typically be
> > conducted by buying or selling amounts of the underlying in reaction
> > to changes in the variable relationship you have outlined (the
> > results of which can never be perfect).
>
> > > > Von: Robert Hodge [mailto:r-hodge@x...]
>
>
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