Subject: option hedging for ees
eugene ,
bob and i had a discussion about your question you raised yesterday .
for an option writer , he has the obligation to deliver , so he hedges it with
the underlying by adjesting delta positions . the hedging cost , theoretically ,
should be equal to the fair value of the option premium .
on the other hand , for the option holder , he has no obligation , by delta
heging ,
he would pay double for the option , with no upside . so he should not hedge
it at all .
if the option holder wants to protect the time value of the option , he should
sell
the option to the market or some equivalent options to create a theta - neutral
portfolio .
this may require trading in both the orginal and the equivalent option
underlyings .
our question to you , if the call options you mentioned are embedded in the
ees
contracts , say fixed price sale contracts , what makes it possible to just
separate those options
and sell them to the market to retain the full values of the options ? we
conjecture that these
options are meant to hedge the original contract . by selling those options
you eliminate the upside of the
original contract .
give one of us a call if you want to discuss this further .
zimin