Portfolio Gamma Management refers to the active strategy of controlling the rate of change of a portfolio’s delta, which is its sensitivity to movements in the underlying asset’s price, by adjusting positions in options or the underlying asset itself. Gamma, a second-order derivative, indicates how much delta changes for a given change in the underlying price, making its management crucial for non-linear risk.
Mechanism
Portfolio gamma management involves continuously monitoring the aggregate gamma exposure across all options and derivative positions within a portfolio. Trading systems execute offsetting trades, typically by buying or selling options with complementary gamma profiles, or by adjusting positions in the underlying asset to neutralize or target a specific gamma exposure. This requires real-time calculation of all relevant Greeks and rapid execution capabilities to maintain the desired risk profile.
Methodology
The strategic purpose is to maintain a desired risk profile, particularly in highly volatile crypto options markets, by controlling the portfolio’s sensitivity to price acceleration. This methodology aims to flatten the PnL curve against sudden price shifts, enabling traders to profit from specific volatility scenarios while limiting downside risk from rapid market movements. Its framework utilizes dynamic hedging techniques to manage the non-linear risks inherent in options portfolios effectively.
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