Gamma Rebalancing, within crypto institutional options trading, refers to the dynamic adjustment of an options portfolio’s underlying asset position to maintain a desired level of gamma exposure. Its purpose is to manage the sensitivity of the portfolio’s delta to changes in the underlying asset’s price, thereby controlling the overall risk profile and profitability of options strategies. This prevents undesirable delta fluctuations.
Mechanism
The operational mechanism involves continuous monitoring of the portfolio’s gamma, often calculated through option pricing models. When the underlying asset’s price moves, altering the delta and subsequently the gamma, an automated system executes trades in the underlying asset, buying or selling spot crypto, to restore the gamma to its target range. This process requires precise market data and low-latency execution capabilities to be effective.
Methodology
The strategic approach aims to neutralize or target specific non-linear price risks inherent in options positions by actively managing the rate of change of delta. Governing principles include optimizing rebalancing frequency against transaction costs, accounting for market liquidity, and integrating real-time volatility estimates. This framework is crucial for options market makers and sophisticated institutional traders to maintain controlled risk exposure and manage implied volatility profits.
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