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Ol’ Wisco | They likely aren’t fully delta hedged. The reason to become fully delta hedged is to mitigate exposure to an assets price fluctuations. I would tend to assume that most MM funds have a directional bias built into their strategy. Now with that being said I could see how they really wanted to get exposure to volatility last week and prior. IV were incredibly low in corn, there was next to no call skew in the market and we were coming up on the most volatile part of the growing season with respect to market movement. All while holding ITM short positions. If they wanted to have maximum Vega exposure without compromising their cost and delta position they would have gone to the 15-25 delta OTM options. These options have the biggest vomma exposure (measurement of change in price with respect to an options Vega movement). In doing this they have multiple things happen that help their overall portfolio risk.
1. They drastically cut down on margin because of the upside option covering price exposure on their shorts in the event of s run up.
2. They obtain the cheapest long Vega exposure by being long 15-25 delta options and don’t give up an exorbitant amount of delta to do it. (From -1 delta to -.85-.75).
3. They now have exposure to the call skew in the corn market that didn’t seem to have to worry about but it was cheap.
4.They don’t have to worry about being caught in a short squeeze if the market does go biggly by simply letting their long calls exercise and cancel out their shorts futures.
From my perspective the funds are in the drivers seat. They made the right move and now have the opportunity to adjust their portfolio around with some volatility back in the market. | |
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Why aren’t funds covering
