Okay so I put on a 1 contract SPX long straddle (trading small because I want to work on my delta hedging) on Wednesday with the contracts IV at 9.2% for a price of 26.80 and I have closed it out today for a relatively super small gain, almost a scratch. SPX has moved down 40$ From when I put the trade on. The straddle is now worth over 40, however I started hedging every 25 deltas, and found myself 75 deltas long the underlying and a portfolio delta of only 25! My underlying hedge took almost all my gains away!!! Like WTF I understand hedging will reduce my PNL variance at a cost. Thats what a hedge is! But to take away all my gains. Can anyone comment on what I did wrong here THANKS. PS. maybe it just makes sense to buy the straddle and sell it when it hits a certain #. However that would mean to sell a straddle and buy back at a certian number which is a path for disaster.
The reason I closed out trade was i was -20 deltas and IF I bought 200 SPY I would have only 5 deltas to look forward to to the downside. My vega was depleted and even tho IV is now at 12, I have no vega $ to lookforward to. UGHHHH
Which straddle did you buy? 2700 Apr? Can you post all trades plz? My guess... theta is a bitch. That's what hedging does... we drop 1.5% over 3 days (2700 to 2660) with IV of 9.2% giving roughly 0.5% daily movement. So I guess it more or less lined up.
APRIL 18 spot 2709 APRIL 18. BOT 1 SPX 2710 APRIL 23rd straddle for 26.80 APRIL 19 10 am BOT 250 SPY @ 269.19 (hedge short deltas) APRIL 19 11:15 am BOT 250 SPY @ 268.74 APRIL 19 1:28 pm BOT 250 SPY @ 267.86 Going into Friday I only had 25 deltas left on the downside. APRIL 20 SPOT moves down and I am short 20 deltas. If I cover my deltas I have 0 deltas to the downside. I decide to close the position APRIL 20 11:23 SELL 750 SPY FOR 266.73 SELL 2710 STRADDLE 41.80 average cost of shares 268.59. Profit (loss) on shares = (1395.00) Profit (loss) on straddle = 1500. Net profit (loss) on trade ~ $105 - commission ( ~ $8) Realized vol over the three days was 11.2 but the SPX just moved in one direction so it killed me.
when I bot the contract it was 5 days to expiration. vol per day = 9.2*sqrt(5/365) = 1.07. <- that would be my daily expected vol right? 1.07% How did you get .5%?
No.. 9.2*sqrt(1/365) = daily expected move of 0.48% Yours would be expected move over 5 days... which more or less the same move as you expect from the straddle value of 26.80/2710=0.99%... that makes sense... since you need that to cover total theta over 5 days when you buy&hold the straddle. Also, you can't just say 1 day exp move = 0.5%, so the 5 day move is expected to be 2.5%... since moves are up and down and usually you hedge to flat position EOD. Also, with 4.6 days to go (Monday morning - Friday afternoon) 26.80 in the 2710 straddle is more like an IV of 11...
Whoops silly me. If you look at the line I took, do you see a major flaw here or is that the standard path? I closed the trade because one of my option legs were almost at 1 delta. I believe it was the right decision to close it off because my gamma was approaching near 0. Thoughts?
Well there you go... 26.80 on the 2710 straddle with 4.6 DTM = about 11%... so I guess implied = realized...
IB was quoting me 8.9 on the call and 9.4 on the put. Sorry for some reason didn't see the rest of your post. Thank you for posting. I appreciate the time taken.