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Gamma Neutral

What is 'Gamma Neutral'

A method of managing risk in options trading by establishing an asset portfolio whose delta rate of change is zero. A gamma-neutral portfolio hedges against second-order time price sensitivity. Gamma is one of the "options Greeks" along with delta, rho, theta and vega. These are used to assess different types of risk in options portfolios. The risk level of an options portfolio could also be managed through delta neutral, theta neutral and vega neutral strategies, which are used to hedge against the risks of price sensitivity, time sensitivity and implied volatility.

Explaining 'Gamma Neutral'

A gamma neutral portfolio can be created by taking positions with offsetting deltas. This helps to reduce variations due to changing market prices and conditions. A gamma neutral portfolio is still subject to risk, however. For example, if the assumptions used to establish the portfolio turn out to be incorrect, a position that is supposed to be neutral may turn out to be risky. Furthermore, the position has to be rebalanced as prices change and time passes.


Further Reading


Asian options, the sum of lognormals, and the reciprocal gamma distribution
www.worldscientific.com [PDF]
… The purpose of this inversion is that we can compute the first two risk-neutral moments of the payoff function and … parameters that specify the pdf In other words, if we want to approximate a random variable by the reciprocal gamma … 208 Quantitative Analysis in Financial Markets …

The variance gamma process and option pricingThe variance gamma process and option pricing
academic.oup.com [PDF]
… The purpose of this inversion is that we can compute the first two risk-neutral moments of the payoff function and … parameters that specify the pdf In other words, if we want to approximate a random variable by the reciprocal gamma … 208 Quantitative Analysis in Financial Markets …

The variance gamma (VG) model for share market returnsThe variance gamma (VG) model for share market returns
www.jstor.org [PDF]
… The purpose of this inversion is that we can compute the first two risk-neutral moments of the payoff function and … parameters that specify the pdf In other words, if we want to approximate a random variable by the reciprocal gamma … 208 Quantitative Analysis in Financial Markets …

Is Petrobras Options Market Efficient? A Study Using the Delta-Gamma Neutral StrategyIs Petrobras Options Market Efficient? A Study Using the Delta-Gamma Neutral Strategy
www.tandfonline.com [PDF]
… The purpose of this inversion is that we can compute the first two risk-neutral moments of the payoff function and … parameters that specify the pdf In other words, if we want to approximate a random variable by the reciprocal gamma … 208 Quantitative Analysis in Financial Markets …

Delta, gamma and bucket hedging of interest rate derivativesDelta, gamma and bucket hedging of interest rate derivatives
www.tandfonline.com [PDF]
… The purpose of this inversion is that we can compute the first two risk-neutral moments of the payoff function and … parameters that specify the pdf In other words, if we want to approximate a random variable by the reciprocal gamma … 208 Quantitative Analysis in Financial Markets …

Option pricing using variance gamma Markov chainsOption pricing using variance gamma Markov chains
link.springer.com [PDF]
… The purpose of this inversion is that we can compute the first two risk-neutral moments of the payoff function and … parameters that specify the pdf In other words, if we want to approximate a random variable by the reciprocal gamma … 208 Quantitative Analysis in Financial Markets …

Estimating risk-neutral density with parametric models in interest rate marketsEstimating risk-neutral density with parametric models in interest rate markets
www.tandfonline.com [PDF]
… The purpose of this inversion is that we can compute the first two risk-neutral moments of the payoff function and … parameters that specify the pdf In other words, if we want to approximate a random variable by the reciprocal gamma … 208 Quantitative Analysis in Financial Markets …

Maximizing the expected net future value as an alternative strategy to gamma discountingMaximizing the expected net future value as an alternative strategy to gamma discounting
www.sciencedirect.com [PDF]
… The purpose of this inversion is that we can compute the first two risk-neutral moments of the payoff function and … parameters that specify the pdf In other words, if we want to approximate a random variable by the reciprocal gamma … 208 Quantitative Analysis in Financial Markets …


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