Options autohedging for Hegic LPs (Part 3):

  • I built a model that takes into account Hegic pricing to know how much capital LPs receive from selling options (as that is the maximum amount they can use to hedge at t0)
  • The model also takes into account current spot, option strike, expiry
  • After several calcs, the model returns mark-to-market, total P&L and some other relevant outputs for the ARFs approach (buying/selling the Delta 1 and being short X option)
  • I used Black-Scholes greeks. I have worked a bit in some alternative greeks that are useful for Hegic as Hegic options don’t follow Black-Scholes, plus Black-Scholes is heavy computationally speaking. This could be pretty relevant for things such as jmonteer H2M at a portfolio valuation level, so I may put some more work on it…or may not.
    However, for the purpose of this analysis, it is ok to use Black-Scholes due to the fact that — as said before — In the current status of Hegic and even when a secondary market develops, as far as the pool buying the options
    in secondary was a different one from this main pool we are trying to hedge here, it would be ok to focus on hedging the “intrinsic value” of the option
Sneak peek: Hegic Call Delta for given days to maturity (Strike 1850)
  • I have built some big (these are actually quite huge) sensitivity tables for delta, gamma and theta where to check what those greeks are for different times to expiries and underlying prices
  • This works both for ETH and WBTC, I just change the spot ref and IV inputs and that’s it
  • I take the whole time to expiry and divide it in periods of X hours. In this way you can play around with “observation windows” (more on this later)
  • I calculate the Implied move in underlying (calculated from the IV vol) for the respective observation window and I also include a factor of “Potential realized move excess vs Expected move from Implied (x Times)” for anyone to able to check different scenarios in terms of realized vol vs implied vol
  • With that, I randomize the spot moves until expiry for each period
  • Once I have that, it is easy to know the option’s greeks for each period (or observation in each period, more precisely): I just go back to the sensitivity table and take delta, gamma, theta for that spot and time to expiry
Figure 1: Mark-to-Market Comparison: Naked Calls Sold vs Hedged Portflio of Calls and Futures
Final realised P&L: Naked Calls Sold vs Hedged Portflio of Calls and Futures
Number of new futures bought in each observation window: Way 1
Number of new futures bought in each observation window: Way 2

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GammaHamma

GammaHamma

Ex-derivs sell-side @ IB. Derivs enthusiast. Crypto learner.