Gramhum Convexity Option Trading

Gramhum convexity option trading

Subject:

Convexity

thanks - i understand that convexity is the relationship between the price and yield of a FI instrument.

not sure how this correlated to CTA's though.

Well, that's not entirely right. There are two related but distinct concepts called convexity in finance.

BOND convexity is a measure of how sensitive a bond's price is to moves in interest rates.

OPTION convexity (which is what's at issue here), or gamma, is the rate of change of an option's delta as the price of the underlying changes.

In the context of your original post it probably refers to trades where CTAs (who almost exclusively use options as you probably know) are able to "recover" from drawdowns by using high-gamma options to "accelerate" their investments (only works if you're right though.) A straddle is also a form of gamma trade.

Gramhum convexity option trading

In a straddle you make money as long as the underlying moves in either direction, and if you make a straddle with high-gamma options, the more it moves the faster your gains increase-Delta becomes greater and greater, so a $1 increase in the underlying is >$1increase in your option's value (and increasingly more so every with each $1 move).

I'm not an options expert so hopefully someone on here who is can confirm this/give you some additional advice.