Strategies · Library · Volatility
§7.4.1Volatility
Volatility risk premium with gamma hedging
A variant of §7.4 Volatility risk premium
Keep the sold straddle direction-neutral by trading the underlying as it moves, so the return comes from time decay rather than a view on volatility level. The hedging cost eats the premium if the market trends.
- Asset class
- Volatility
- Held for
- Weeks
- Data
- Needs data ARCANE lacks
- Symphony
- Cannot be built as a symphony
The rule
- Signal
- Index move away from the strike, which sets the hedge trades.
- Entry and exit
- Rehedge as the index moves; close at expiry.
- Sizing
- Hedge size follows option sensitivity.
How it fails
- Hedging costs rise in trends
- Whipsaw
- Short option risk
Data it needs
- option prices
- intraday index prices
No options or intraday data.
How ARCANE uses it
Not usable beyond background.
Needs options and frequent hedging.
Filed under the volatility card
Hold less after a month of high volatility and more after a calm one. The paper found this raised return per unit of risk, because volatile spells are not paid for with higher returns.
A paper plan from this card holds 5 to 63 days, stops at 2.5× the expected move and uses at most 50% of your risk budget. The card
Source: Kakushadze and Serur (2018), 151 Trading Strategies, §7.4.1, p. 84 of the SSRN version. Described in our words. Volatility is ARCANE’s filing, not the book’s.