As i typically say.. your always exposed to direction in some respect.. and the idea behind neutral trading has been de bunked so many times... as the assumptions of hedging continuously in time without friction aren't real at all.. even in static replication IE box or jelly rolls you are exposed to changing interest rates and dividend risk.. the more someone presents "delta neutral" trading as something a world away from directional trading.. the more i think they don't know the risks associated with it.. your bleeding or scalping gamma when you hedge options.. your speculating on hedge frequency and size... you can slow play the size and frequency of your hedges to stay more short gamma as you feel it is over priced or you can front run it because the underlying is so clearly moving against your options positions therefore you can more then offset your losses in the short options.. so how the hell are you not directional when your dynamically delta hedging..
Ahh I just call it the sweet spot. I haven't bought an option all year but I sell what I consider directional strangles. Take right now in oil for instance. We are in this wonderful wedge with a top currently around 94.50 and a bottom around 88. I sell the 94 and 95 calls and sell the 88 and 89 puts and just collect the theta every few day or just adjust my delta to suit a shorter time frame pattern. when the shit hits the fan and the breakout happens I just buy or sell the outright in that direction and it buys me time to unwind the strangle. But ideally I'm out a couple of days before the breakout actually happens because I'm stalking the directional move. I never really care about what the price is at expiration if you can guess that you're fucking rainman. I generally move on to the next month when there are 4 or 5 days left on the front month because the gamma makes it to risky.
They are vastly different, assuming one takes a predefined systematic approach to hedging. [QUOTED]Quote from cdcaveman: As i typically say.. your always exposed to direction in some respect.. and the idea behind neutral trading has been de bunked so many times... as the assumptions of hedging continuously in time without friction aren't real at all.. even in static replication IE box or jelly rolls you are exposed to changing interest rates and dividend risk.. the more someone presents "delta neutral" trading as something a world away from directional trading.. the more i think they don't know the risks associated with it.. your bleeding or scalping gamma when you hedge options.. your speculating on hedge frequency and size... you can slow play the size and frequency of your hedges to stay more short gamma as you feel it is over priced or you can front run it because the underlying is so clearly moving against your options positions therefore you can more then offset your losses in the short options.. so how the hell are you not directional when your dynamically delta hedging.. [/QUOTE]
It is often a combination of a delta bet and a bet on volatility. Here is an example. AAPL closed at 527. If I think AAPL will rise from now to Jan expiration but not fire up, I could: B/10 AAPL Jan 530 calls 10.90, 47 delta S/20 AAPL Jan 550 calls 4.20, 24 delta Net 2.50 I will never wait until expiration day to take this off, but I would most likely wait until mid expiration week. Given that, I'll likely make money with the stock if it stays the same or goes up, but not to quickly. I attached this example.
Hi 1245, I know exactly what you refer to.A long time ago,I was the head trader of emerging market equity derivatives at Salomon Smith Barney,and am somewhat familiar with ratio spreads I trade similar spreads to you,but never assume the stock couldn't "fire up" when I least suspect it.If I am bullish,I never want to lose money because I am dead right. This is a good thread T
PM,what you do is 100% directional. My best guess is you are trading a size that that cant do too much damage to your financial health.Assuming a stock wont drop below your short strike and not adjusting till then is fine and dandy on a small portfolio,but if you levered up,you would be singing a slightly different tune
The point is to match the spread and ratio to our expectation. If your more bullish, sell an option more OTM or on a different ratio. We can't be right all the time and are trying to put the odds more in our favor. 1245
While I assume (hope) the stock won't drop below my strike, I don't feel restrained, restricted, or limited to that strike. Unlike a leveraged spread trader, I can allow the stock to trade up to 20% below my strike, and not think twice about it. While I'm usually leveraged, its to a reasonable degree. And I'm "diversified" enough, that if 75 - 80% of my stocks get put to me, with the remaining 20 - 25% expiring, I won't even be on margin. I have no problem owning my stocks at my strikes, selling covered calls, and collecting dividends..... until they recover or become neutralized. But then again, I'm picky about the stocks and strikes I select. Thus, while I'm classified as a directional trader, I feel more like a "range trader", with a very wide 2 sided range to work in.... with one side being unlimited, and the other range being about 20% below my strike. On the other hand, if a put selling trader like me is not as diversified, and is using excessive leverage, and has double my % return goals, and is not as picky about their stock and strike selection,........ then ignore everything I stated above.