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2 Comments

  1. Pratap Prabhu
    April 2, 2023 @ 2:36 pm

    Great post. In theory, won’t the cost of hedging (trading cost) eat up any delta between RV and IV? I doubt these OTC contracts are cheap for retail

    Reply

    • spintwig.com
      April 2, 2023 @ 10:16 pm

      Thanks!

      Not necessarily. Delta hedging with long/short underlying is free at most retail brokers, sans a few pennies when selling shares. Counterparties that would be willing to take the other side are likely to incur nominal incremental costs to hedge their position. Some of the largest players are likely to generate revenue on their trading in the form of rebates.

      The difficult part of doing it yourself is the automation (or not) of the delta-hedging trades, the adjusting of the option strip, and staying below the threshold to not be classified as “professional”. That designation comes with headwinds in the form of potentially less favorable fills and higher fees for market data.

      Reply

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