12:00 - company announces a profit warning, unfortunately you have a short gamma position and the stock is down 5%. This is one of the situations you hate to be in. The stock is down 5% and because of the short gamma you are long a lot of delta. Now do you sell the shares 5% down or hold on and hope it rallies back. As a personal rule I like to keep my delta's from my short gamma's to a certain limit, and I hedge so that it never crosses that limit. You do not want to be stuck with a stock that drops 20% in a day and you just sit there watching it.
This is also important that you know everything about your short gamma's, more so than your long's, because if something gaps down you need to know what your pnl and delta is. With longs its fine because its positive pnl, but negative pnl always brings more senior attention. You also need to make sure you know not just your local risk, but your risk as spot moves. Because in a client flow book you have thousands of positions, your risk can quite easily flip as parameters move. That is why you need to look at your risk in three dimensions, time and spot. Its what makes derivatives more interesting than delta one products, but it also takes a bit more effort in terms of risk management.
mod note: this was originally posted on http://www.salesandtradingcareers.com/#/day-in-the...
Came across this in an AMA from 2013. I have two questions:
1. Is the OP saying that their portfolio is simultaneously net short Gamma + long Delta? Is that possible?
2. If you're short Gamma, wouldn't a company's profit warning + its stock falling generate profit for your position?