Statement:
“A delta hedged portfolio should also be gamma hedged. This ensures that the value of a portfolio consisting of a short option position and a position in the underlying does not change when either delta or volatility changes.”
Is the above statement correct or incorrect
Incorrect and reason:
**Gamma hedging does not ensure hedging against volatility changes. A delta hedged portfolio with a zero gamma can greatly change in value if the volatility changes
My query: does gamma only hedge the delta (non linear volatility) and not the volatility of the underlying.
Why is the statement in correct.
I am unable to link the reason to the statement.
The hedge entails combining the underlying stock position with two options positions in such a manner that both delta and gamma are equal to zero.
My query: does the above mean :
(underlying stock position + delta + gamma =0) or (delta + gamma =0)