Volatility Trading and Arbitrage Strategies › Key Parameters
Michael BrenndoerferDecember 30, 20251 min read
Quantitative FinanceAll chapters Part 11 of 15Quantitative Trading Strategies
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The key parameters for delta-hedging strategies are:
- S: Current stock price. The primary driver of option value and delta.
- K: Strike price. Determines the moneyness of the option and gamma concentration.
- T: Time to expiration. Affects theta decay and gamma magnitude.
- r: Risk-free interest rate. Used in the Black-Scholes pricing and carrying cost calculations.
- σ_imp: Implied volatility. Used to price the option and calculate the hedge ratio (delta).
- σ_real: Realized volatility. The actual volatility of the underlying asset that determines rebalancing P&L.