December 5th, 2011, 9:43 am
"Can greater profits be realized by delta hedging in non equally spaced intervals?"yes, if you can do it better than the majority of other market participants - this is not trivial though. Loosely speaking they are likely to increase their realized vol (on equities at least) by hedging more frequently than daily, due to the (slightly) mean reverting nature of equity prices. If you have lots of options to hedge, what you describe might require automating, which costs £$£ to setup and might not be worthwhile unless the hedging improvement is sufficient. Where I worked, our reference was daily hedging, rather than just sitting on the options until expiry."Is that the foundation of volatility arbitrage hedge funds?"no, this is not the foundation, but may be a tool used to give them an advantage on some of their trades. The foundation is deciding what volatility to trade...They fundamentally want to trade Implied and/or realized vol across individual or baskets of underlyings. E.g. if you believe realized>implied for AMD over the next 6Months, you might buy some 6M options/varswaps and hedge them, on average picking up a bit more realized vol using your "non-equally spaced intervals", but this is unlikely to turn a bad volatility bet into a good one. For a non-realised vol example, you might also believe the 3M implied vol in 3 months time will be different to what the market currently has priced... so you might trade a forward volatility agreement, purely based on your belief about 3M implied vol in three months time, with the intention of liquidating your position in 3Months time, and (hopefully) profiting from the move in implied vol.Some funds will be predominately short vol and so not want to hedge often in the way you describe even if they could.
Last edited by
mg298 on December 4th, 2011, 11:00 pm, edited 1 time in total.