At what point does a delta neutral postion unbalance ?

Discussion in 'Options' started by Aston01, Jun 7, 2012.

  1. Aston01


    Is it possible from a percentage change perspective to determine at which point one side of a delta neutral position begin gaining value faster than the other side could lose value?

    And the second half of the question ... after a 50% decrease in value on the losing leg wouldn't the 100% percent gain required to get back to even make it more sensible to sell the losing leg and convert the delta neutral trade into a directional trade with a stop loss to prevent a rollback past that threshold ?

    This is based on the assumption that you entered the delta neutral trade with the expectation of a big move in one direction of another to achieve profitability.

    Percent decrease - Percent gain required to get you back to even
    5% 5%
    10% 11%
    20% 25%
    25% 33%
    30% 43%
    35% 54%
    40% 67%
    45% 82%
    50% 100%
    75% 300%
    90% 900%

    This hasn't been the easiest question for me to find an answer to so it you see room for improvement in my logic please let me know ...that's why I bothered to ask.
  2. omg, no. It's not linear.
  3. Aston01


    Please explain ... I am very comfortable feeling like an idiot if that's what it takes to get a better understanding.
  4. Meaning you're not approaching it correctly. It would take some time to explain, but I have to run. Your method won't work with a convex vol-asset.
  5. Delta doesnt change at a constant rate... The key here is gamma, it also isnt fixed so its a real hassle. I have not seen an easy way to predict delta change so far. IMO you are fighting an uphill battle...
  6. Aston01


    Does the situation tend to be more exacerbated in longer term trade (i.e. one where you hold the position days or weeks) or a shorter term trade ( i.e. position held minutes or hours) ?

    And does opting for an OTM delta neutral position somewhat mitgate the issue or create even more of a problem.

    BTW - Thanks for the feedback ...I know there are holes in my understanding and I am trying to make the effort to close some of them.
  7. sonoma


    There are lots of neutral delta positions. Can you give us an example trade?
  8. sonoma


    Can you give us an example of this trade as well? Is this the same type of neutral delta position as in your first question?
  9. being long 100 shares of stock is like being long 100 deltas, so to hedge (get neutral) sell 2 at the money puts with .50 delta, so then you are long 100 deltas and short (-.50 x 2 = -100) deltas. This is a can of worms, the tough question is when to hedge; there are different ideas about when to effect a hedge, delta moves with price of the underlying. Think of them as chained together.

    this article may help you......
  10. nathanir


    You surely mean go long 2 ATM puts to neutralize the 100 delta of 100 shares?
    #10     Jun 8, 2012