Volatility Smile and Delta Hedging (Part 2) — Down the rabbit hole of Smile Risk Hedging.

  1. There is a negative relationship between Gamma and Time — the longer our option, the less sensitive the option to the move of the underlying asset.
  2. There is a negative relationship between Gamma and Volatility — Higher volatility level reduces the option's gamma (if you are interested in exploring the relation between Vol-Gamma-Theta, take a look at this blog ). Furthermore, because of the volatility smile shape (i.e., premium for puts over calls in vol term), we were originally slightly long Gamma, which means that as the spot moved down, we were actually in positive gamma territory.
  1. Frequently hedging vega risk using options is costly (high transaction cost and fees)
  2. Any option that we add to our book adds another subset of exposures — Think about an option as a subset/vector of risks (say, an array of MTM+ Greeks). By adding options to our book, we accumulate multiple subsets, which can turn our options book risk profile into something we might not intend to (in addition to multiple pin-risks for specific strikes in our options book)

Breaking down Smile Risk

Smile Risk spot/vol sensitivity matrix

Delta Hedging and Strike Conventions

Sticky Strike or Sticky Delta — What is your flavor of choice?

Sticky Delta/Moneyness

Sticky Strike

Few words about volatility surface modeling…



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Harel Jacobson

Harel Jacobson


Global Volatility Trading. Python addict. Bloomberg Junkie. Amateur Boxer and boxing coach (RSB cert.)!No investment advice!