Arka Bose
Active Member
Just thought I would like to share how you actually loose money regardless of the direction of the underlying when you are short gamma (or convexity) by shorting an option.
∆a be the underlying shares (or bonds whatever)
we know convexity as ∆a+ 1/2 Г a^2
Thus, our net position will be ∆a - [∆a+1/2 Г a^2] = - 1/2Гa^2
Notice in the above that what ever the sign of the ∆a (positive or negative) you will have only one result, i.e -1/2Гa^2.
Thus, short convexity or gamma is always risky.
If this was shared earlier, sorry for repeat.
∆a be the underlying shares (or bonds whatever)
we know convexity as ∆a+ 1/2 Г a^2
Thus, our net position will be ∆a - [∆a+1/2 Г a^2] = - 1/2Гa^2
Notice in the above that what ever the sign of the ∆a (positive or negative) you will have only one result, i.e -1/2Гa^2.
Thus, short convexity or gamma is always risky.
If this was shared earlier, sorry for repeat.
