Subject: Option P&L
From: [email-masked]
To: [email-masked], [email-masked]
Cc: [email-masked], [email-masked], [email-masked], [email-masked]
Date: Thu, 12 Oct 2000 00:11:00 -0700 (PDT)

Gentleman:
        The ERMS system, as you know, has an excellent capability for 
decomposing option P&L into the following components:

new deals
curve shift
gamma
vega
theta
rho
drift
2nd order adjustments

What i dont understand is the gamma component which is reported in dollars.  
The unit of measure suggests that incremental changes in a contract position 
is being associated with specific prices.  These prices are the effective buy 
or sell prices associated with the dynamic delta position.  

Stated differently, the standard taylor expansion has incorporated a price 
variable in such a way as to convert the unit of measure from gamma's 
standard contract count to total gamma dolalrs.  This is something I dont 
understand.  To date, inquiries to the risk management accounting group has 
further revealed that the gamma component of P&L is not well understood.  

This is what concerns me: Bridgeline has 2 books with option exposures (NYMEX 
and Gas Daily).  Both books dynamically hedged its positions during 
yesterdays large price move and, through anticipitory hedging in advance or 
during the large price move, secured sufficient coverage to neutralize 
expected changes in delta.  However, our P&L from our underlying position did 
not offset our gamma P&L.  Consequently, I have to ask WHY?  Im hoping that a 
brief look at the why gamma dollars are calculated may reveal something which 
will better guide our hedging decisions.

Any help is appreciated