Allocating Hedging P&L Across Options by Gamma

Summary

The document asks how to attribute stock-trading profit and loss to individual options in a delta-neutral portfolio when the stock is traded only to hedge those options. It compares allocating the hedge result in proportion to each option’s gamma with allocating it by absolute gamma, which treats same-underlying options more like a combined position. It also notes that simulating market movements with intraday data could improve attribution accuracy.

The discussion does not select or validate an allocation rule; it seeks alternatives that do not require intraday data and might be more accurate than the two gamma-based methods. No empirical evidence or worked example is provided, so the relative accuracy of the proposals remains unresolved. The question highlights a practical limitation: attribution depends on how shared hedging trades are assigned to positions, and coarse data may not reveal each option’s contribution separately.

Key ideas

• The document considers attributing underlying-stock hedge P&L to options in a delta-neutral portfolio.
• One proposed rule allocates P&L in proportion to each option’s gamma.
• A second rule uses absolute gamma to allocate the shared hedge result across options.
• Intraday market-movement simulation is suggested as a potentially more accurate attribution method.
• The discussion leaves open whether other methods can improve attribution without intraday data.

Tags

# Attributing hedging p&l to several options


# Attributing hedging p&l to several options












Given a delta-neutral portfolio of one underlying stock and several options, I'm trying to attribute stock trading p&l to the options (assuming the underlying is traded only for hedging purposes).

I see different approaches to this, one is

> allocating it proportionately based on the value of each option's Gamma (akin to dynamically hedging each option one by one)

or

> allocating proportionately to the absolute value of the Gamma (which resembles more to dynamically hedging all the options of same underlying as one).

If we have intraday data, we can be more accurate by

> allocating through a simulation of the market movement.

The first 2 is definitely less accurate than the last method, so my question is,

> Are there other allocation method doesn't require intraday data?

Preferably, with more accuracy than my first two approaches but I'm just looking for other ideas and am open to suggestions.

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