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Strategies & Market Trends : Canadian Options -- Ignore unavailable to you. Want to Upgrade?

To: Lloyd R who wrote (1450)	1/13/2000 6:19:00 AM
From: Porter Davis	Read Replies (2) \| Respond to of 1598

>> how specialists actually "hedge" themselves... Interesting question. The short answer is by buying or selling the underlying stock. The ideal would be option on option hedging, but most classes here unfortunately don't have that much 'paper'. I'll bore you with a brief bit of theory: I have about 80 different positions in Ballard options ranging from long deep in-the-money calls to short out-of-the-money puts. All of these combined are mathematically calculated to give me a net equivalent stock position (the "delta"). If I don't like that number, I offset by taking the corresponding action in the stock. It gets complicated by the fact that the delta changes both over time and as the price of the underlying moves. (More "greeks"--theta and gamma). For example, the public was way ahead of me in pricing BCE calls and put me in the position of being short both puts and calls, which forced me to be long the stock. When BCE did its whoop-de-doos the last couple of weeks I was in the unwelcome position of having to buy stock on the way up and sell stock on the way down to try to stay 'on-side'. Not a good way to prolong a career. Being a specialist is sort of like playing three-dimensional chess; every time we buy or sell an option, it effects our overall position and we have to assess whether to 'hedge'. Don't forget that specialists don't get to 'choose' what we trade per se, we can only take the opposite side of what the public wants to do. Our goal is to try to find the "price" (using the implied volatility component of our option modeling formula) where buying and selling is evenly balanced. More voodoo than science, I'm afraid. As I said, after 15 or so years of trading BCE options at a 30 volatility, I was a little slow off the mark in recognising that the new 'natural' level was 55, and I paid the price for that. Live and learn. Hope this helps explain what we do a little. Happy trading. Porter E&OE