medium · Quantitative Finance derivatives
A volatility trader sells an option with an implied volatility of 25%. Over the life of the trade, the trader maintains a delta-neutral hedge.
If the realized volatility of the underlying asset is consistently 20%, what is the likely outcome for the trader's total P&L?
- The trader breaks even because delta-neutral rebalancing neutralizes all volatility risk.
- The trader realizes a profit because the time decay collected exceeded the losses from gamma rebalancing.
- The P&L is determined solely by the final spot price relative to the strike price.
- The trader loses money because the realized moves were not large enough to justify the delta hedge costs.
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