© Stefano Grazioli - Ask for permission for using/quoting: [email protected] Team submission possible from H17 email me with team name, members (userids) and get the team # on collab. Easy meter Questions? Team formation / paper / opting out © Stefano Grazioli - Ask for permission for using/quoting: [email protected] © Stefano Grazioli - Ask for permission for using/quoting: [email protected] Going long / short = flipping horizontally the payoff curve Profit & Loss Profit & Loss long Stock price $10 price at which you bought it Stock price $10 short Profit & Loss long call Profit & Loss Stock price Stock price strike strike short call Profit & Loss Profit & Loss short put Stock price strike long put Stock price strike TCs always lower your payoff curve Profit & Loss Profit & Loss long - TC $10 TC Stock price $10 short - TC TC Stock price TCs always lower your payoff curve Profit & Loss Profit & Loss long - TC $10 TC Stock price $10 short - TC TC Stock price © Stefano Grazioli - Ask for permission for using/quoting: [email protected] Combine different types of positions to obtain custom payoff curves. Payoff curves are designed to achieve different objectives. Hedging is one of them. 1. 2. 3. 4. 5. 6. 7. Offsetting the position (not applicable) One to one One to many Dynamic approaches Synthetics (based on put/call parity) Delta hedging (based on Black Scholes) Delta + Gamma hedging (complex refinement) Perfect hedge, but guaranteed to lose money. Impossible do to when a position is illiquid (i.e., you cannot do it in the HT) Profit & Loss Short position Long position to hedge Total Payoff Stock price Profit & Losses Very popular - Neutral to moderately bullish long Stock short call Total Payoff strike Stock price If our position is... ...this is what we (the system) should do A short call Go long on the stock A long call Go short on the stock A short put ... A long put ... A short stock ... A long stock ... Profit & Losses long Stock short call Total Payoff long put Stock price Way out of the money – Inexpensive means to protect wealth from sharp downturns Profit & Losses long on Stock Total Payoff Buy the stock if its price raises above strike, and sell it back if falls below. short call Stock price Yes, there is a catch.... Typically useful for manually managing your portfolio In the past: Most teams did Delta Hedging (next time) Some of the better teams did their own mix of Delta and Gamma hedging There is a dark horse… Profit & Loss Perfect hedge, but costly. Synthetic Short position Long position to hedge Total Payoff Stock price For European Ps and Cs that have the same strike K, and expire by the same time t: C+K -rt e =P+S thus, we can solve for S, P, or C, effectively synthesizing a security with a combination of the other two and some interest-earning cash.