downside risk of selling vol

Linden · October 15th, 2009, 3:28 pm

Let us assume implied is higher than realized and I sell vol by delta hedging. If on some day, underlying gaps a lot, then i would get seriously hurt on daily PnL (even if i end up making money by holding the thing to maturity).Any idea what is a good way to protect against such extreme scenario? Thanks a lot.

daveangel · October 15th, 2009, 3:30 pm

you cant protect against - you coudl do some low risk "vol selling" strategies like buying butterflies. ... but otherwise as the say in fx markets "you got to put your c*ck in the custard".

crmorcom · October 15th, 2009, 3:39 pm

That's a great expression, by the way, daveangel - I shall have to use it as soon as possible. Thank you.