The Greek Letters
3 important questions on The Greek Letters
What about naked and covered positions?
Naked positions works well if you sold a call as long as the value stays below the strike. Covered positions works well if you sold a call as long as the value stays above the strike. So neither of them creates a real good hedge!
What about the delta of a portfolio?
Weighted delta of a portfolio, short positions are negative en long are positive. Dealers usually rebalance daily, depending on the size of the portfolio. The bid-offer spread transaction costs are absorbed by the profits on many different trades.
What about scenario analysis?
Very useful to get insights. Time period depends on liquidity of the instruments. Usually extreme scenario is in one of the corners. But the butterfly spread is different as the greatest loss will be incurred in case everything stays the same.
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