Hi Guys,I am wondering what is the difference in hedging options with implied volatility vs. realized. Let's assume the current realized volatility is a good proxy for the next move and implied is a value expected to materialize at soem point.What is the difference between the two hedging methods?Maybe as an example: Let's assume oil implied vola is very high 80%, which is a risk premium for a future move. The actual vola, however, is much lower, say 20% since -for now- nothing is happeneing. Which vola is the right one to use for my Greeks/hedging? What is teh difference?Thank you very much guysKim

i don't actually know the answer to your question.. but i would think that if you use the implied vol, you will give some kind of implied greeks and hedging, which would be more conservative, whereas if you use the lower "current realized" (do you mean historical vol/garch over some recent period, or something else?) then you will get a cheaper, riskier hedge position. unless there's a well-known answer to your question that is grounded in some reasonable theory, my guess is that these 2 hedges are 2 alternatives for you to decide between based on your risk-preference. i don't know what the big market-maker banks/traders do, that would probably be an important factor also. i do know that option prices are often quoted in terms of implied vol, so when traders are valuing trades, they are trading based on their idea of the implied vol and not the price.

Interesting and it is a very reasonable answer. It seems this is than a trade forum topic.I am surprised that this is not a very well known topic.Following up on the idea: if the realized vola indeed stays at my estimator for current hist vola (EWMA for exampel) I would contantly overhedge my position when using implied.This is also very interesting for skew trades since realized vola does not have a skew (correct?).Appriciate further input for this topic. We could even write a paper about this if this is a new field?

Hi,See this: http://www.wilmott.com/blogs/paul/index ... me-results, and the paper http://www.math.ku.dk/~rolf/Wilmott_Whi ... .pdf.Loads of threads on this around the forum as well.S

QuoteOriginally posted by: StaleSee this: http://www.wilmott.com/blogs/paul/index ... me-results, and the paper http://www.math.ku.dk/~rolf/Wilmott_Whi ... ch.pdf.The above links seems to be broken. But you can speak directly to (or read from) God atWhich Free Lunch Would You Like Today, Sir?: Delta Hedging, Volatility Arbitrage and Optimal Portfolios.An article with a similar subject (quoted in the above) is Parameter risk in the Black and Scholes model.

Perfect, thank you!

Common, you should be able to remove the trailing "," from the URLs.