Also, we usually use some estimator for the expected realized volatility, which we apply to generate signals for volatility trading and delta-hedging. On the other hand, the realized volatility is computed using available time series of price returns. The lognormal volatility in the Black-Scholes-Merton model measures the implied volatility at a specific strike price and maturity date. On one hand, the implied volatility is a forward looking estimate of the returns volatility implied from options market prices. To start with, in practice, we deal with the two types of returns volatility: the implied volatility and the realized volatility. That is why I would like to highlight some of my research and discuss my approach under the discrete time setting and the transaction costs to optimize the delta-hedging. As a result, to optimise the delta-hedging for the practical implementation, we need to consider the discrete time framework. While it is customary to assume a continuous-time hedging in most of the industrial applications and academic literature, the delta-hedging in practice is applied in the discrete time setting. In this post I would like to discuss a practical approach to implement the delta-hedging for volatility trading strategies.
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August 2023
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