In case study “Burr Case Scenario”, Question – “Is Madisox’s suggested hedging strategy for Weehawkin options most likely correct?”
Can someone please explain as to why we have to take gamma into the consideration, as it was told in the class that for the small change in stock price, we just need to construct the delta-hedged portfolio?
Thank you.
P.S. – For your reference – “Burr asks Madisox to outline an appropriate hedging strategy. Madisox replies that to be fully hedged, an option trader will need to consider how changes in the stock price relative to the option exercise price affect the value of the call options. To be fully hedged against a small change in the stock price, Madisox suggests that the proper strategy to construct the hedge is to use call option delta and add the call option gamma to arrive at the number of shares required.”
https://forum.sseiqforum.com/question/delta-and-gamma-2/
Thank you Udit. However, there is still not any explanation for this answer in the given link. Could you please elaborate this one?
Proper explanation has been there.