Using Options on Greeks as Liquidity Protection

David Bakstein, Sam Howison

Abstract

In this paper we suggest derivative contracts related to the Greeks of options; we show how to value them and how they can be used to  manage the risk of a portfolio of derivatives. We further describe certain types of these options, namely those related to the Delta and Gamma, which can be regarded as a form of insurance against liquidity holes and transaction costs for the writer of the contract representing the underlying.

2003-mf-03.pdf   2003-mf-03.ps   2003-mf-03_1.ps