FxWirepPro: AUDNZD volatility optimizer through gamma spreads
We've been formulating a lot of call spreads on highly volatile currency pairs (AUD/NZD is the one among the pool) and have been drawing up some customized strategies by using P&L tools and techniques to look at the opti…
We've been formulating a lot of call spreads on highly volatile currency pairs (AUD/NZD is the one among the pool) and have been drawing up some customized strategies by using P&L tools and techniques to look at the option Greeks.
While doing so it seems like the FX option of this APAC pairs have tons of Gamma. It might be puzzling because on one hand it seems some of these options are highly volatile than any other APAC currency pairs but a tiny shift in the underlying exchange rate would cause instant disaster. This can be arrested by devoting little time on ascertaining an accurate gamma.
As you can observe from the diagrammatic representation, we've constructed call spread by considering gamma closer to zero which would neutralize the implied volatility adverse impact on option prices and this position remains quite firm to achieve our hedging objectives, because we know gamma represents the change in delta, we have healthier delta at 0.38. This results in desired hedging objective irrespective implied volatility disruptions as we've OTM shorts on side and prevailing bull run will be taken by In-The-Money calls.
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