I did a lot of equity pairs trading in 2008 and 2009 when it was a no brainer, providing outsized returns due to volatility. Since then, not the easy buck that it was. Probably due to old habits, once in awhile I dive back in. For example, before the merger, I occasionally traded ABX long versus NEM short (in a 1:2 or 1:3 ratio). Sometimes I turned it into a saga by adding option positions on both as the pair percolated. It was an attempt at more hedging and to take advantage of price movement via option adjustments. I'm wondering if it's reasonable to attempt to calculate the net delta such a position comprised options from different underlyings? If so, given that I was starting with a 2:1 ABX/NEM equity position, should I weight the deltas of the options similarly as well? Is there some reasonably simple methode of determining net delta for a guy on the retail level? Or is this just a function of starting with a faulty assumption that if I'm 2:1 equity then it's all right to assume that options to have the same 2:1 effect on the position ??? Be gentle, I'm retail :->)
Not sure of what you're working on, but two thoughts... • Greeks are rates-of-change, and mathematically, treating them as additive is bad news. Finance has found this (bad habit) handy, though. But one thing you can never do is add them across underlying(s). [An exception, of course, is theta -- where the rate-of-change remains $/time, Yay Team.] • Position Greeks (additive sums for given underlying) might mathematically present a workable ratio in a contract spread, if only you could guarantee that the *two* underlyings would always move in fixed proportion -- which of course they wont, hence your desire to trade them. If IBM and NVDA usually move in tandem, and suddenly compress, and you take that trade (expecting the re-expansion to work to your benefit), there is no guarantee that IBM climbs-or-falls, NVDA climbs-or-falls, or that they operate at all (in tandem) as you might hope. Their deltas would similarly remain unsystematic, and any ratio between them would be doubly uncertain. If I've got your post right, I don't see anything good coming of this. Best (IMO) to treat them entirely separate.
I couldn't find anything to confirm this. For a given underlying it does make sense to sum deltas if you think of them in the physics sense. Your net delta is the total position movement - if you move forward 20 units and back 10 units for every $1 move in the underlying your net movement will be 10. Of course, this is a contrived example - but if you could link a book/source/something with the actual calculus I'd be curious why deltas across an underlying shouldn't be summed.
I think he's referring to underlying(s) plural. Might be tricky to aggregate deltas from different securities. Make sense to me, but I'm not an expert.
It's actually mathematically not correct. The derivative is dependent on a single underlying so mathematically you cannot sum them across differing securities.
Yes, I think we both agree. But I don't know what traders do when they manage a book across securities.
In a word: gamma. If all those different cites of delta were from the same distance, there'd be no problem mathematically or use-wise making a simple arithmetic sum. But when you pluck them from different strikes -- even different *sides* -- the effect of stuff that's ATM or far-OTM will not vary that much -- but that stuff where gamma swings a big stick? Murder. One thing about working indexes is that you get a bit lazy, but I *think* what they do (and what you're referring to) are S&P/market-beta-weighted deltas. Or am I thinking of the market-weighted deltas themselves? I'm going to claim "lazy" again -- we're aiming at 4pm and .....
You could create the synthetic pair using synthetic long and short options positions. Using a 2:1 ABX/NEM position, this would be Buy 2 calls / sell 2 puts ABX at the money Sell 1 call / buy 1 put NEM at the money Anything you do with options could relate back to this synthetic construction of the pairs trade. You could adjust/mix roll the positions whatever. I much prefer futures so can't really give advice on trading the price action of the pair with vol instruments. I'm guessing (and it seems like you know) that estimating the vol of the pair and trading that would get very complicated, very quickly for any kind of complex vol trade.
Hard to get into this, even harder on a cell phone, but what the OP suggests is fine. Run a 30 day correlation. Put a filter on any data where days close to close is less than 25% of average daily movement, then you have an idea of your static net estimated exposure. Essentially a 2 product global risk. Adding a 3rd makes it a bitch. Add 6000 across 8 global markets... No comment. But when someone asks you if it's good or bad for you if the market goes up, ya gotta have some idea. Can't give 6000 answers. With that said...correlation, as I've said before, is a four letter word. Most dangerous thing in risk management, and when you add in volatility on options. Good Lord can that go bad in almost unimaginable ways. ... Nonetheless...
Not really. Correlation modifies vol. Creates it's own vol. Spread vol. Example to the extreme. 2products both trading $100, each trading 100 vol. If 100% correlated has a 0 vol. Now good Lord, should that correlation break down, vol goes to da moon. Ok.. now I have serious stuff to do. League of legends 10th anniversary event. Must play games, must get free rewards... Priorities!!!