A frozen hedge ratio against a moving delta is how convert arb harvests convexity. Nick's bow-tie chart shows P&L rising with the size of the stock move under a passive hedge; in practice you dynamically rebalance — often every few delta points — trading off gamma income against equity bleed and transaction costs. This note makes that policy explicit, including bull/bear tilts and "hedging at what volatility?"
Learning objectives. By the end of this note you should be able to:
- explain gamma capture from a static hedge ratio and changing delta;
- define shadow gamma and when to use it;
- construct bullish and bearish tilt hedges relative to true delta;
- choose rehedge bands under transaction costs and state the hedge-vol issue.
In this lesson
- Gamma capture mechanics
- The bow-tie is not a free payoff
- Designing a rehedge rule
- A precommitted execution rule
- Bull and bear tilts
Before you start
The full lesson, with worked examples and exercise solutions, is for members.
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