AdvancedMultiple choice
Theta pays for gamma · Part 3 of 3
An at-the-money option on a stock at $200 has implied volatility of 25% and gamma of 0.012. Rates are zero and you hold the option delta-hedged.
The month does realise 30% volatility, yet the hedged option makes far less than that estimate. What is the most likely reason?
- AMost moves came after the stock had drifted away from the strike, where gamma is small
- BThe delta hedge was too good, so it removed the volatility profit as well as the direction
- CRealised volatility above implied always loses money for an option holder, whatever the hedging frequency
- DTheta is higher at 30% volatility, so it rose to absorb the gain
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