Delta neutral returns vs. margin

Discussion in 'Options' started by ChrisM, May 7, 2003.

  1. ChrisM


    While gamma scalping itself was a subject of discussion few times already, my concern is the potential profit vs. margin.
    My margin calculation in example below, selling call ATM option and buying delta # shares of underlying goes as follows:

    1. Margin for uncovered portion of call (typically 30% of underlying`s value)


    2. Margin for long stock position (typically 50% for marginable stocks).

    Adding above together gives quite high number, so it would not be easy make significant return on capital.
    Is this calculation right ? Can anybody share some experience regarding this issue ?
    Any opinions greatly appreciated.
  2. ChrisM


    Anyway, thx for viewing:D
  3. The problem is your chosen position composition.

    Try comparing the minimum hedged position margin for long calls/short stock or perhaps long puts/long stock.
  4. Trajan


    try getting away from using stock to hedge. I pass up trades because sometimes the ratio you want to analyse isn't worth it. Why make a trade for a couple hundred bucks which could tie up my capital for a week or two and leave me unable to do anything else? The last thing I look to for a hedge is stock. I'll typically use an itm call as they are the most liquid.
  5. ChrisM



    the beauty of my example is, that it works in flat and moving sideways markets which as we know, is the most common market activity, while your ideas if I well understand, should work better in trending markets, am I right ?
    But your your concepts are very interesting, thx.
  6. ChrisM


    Trajan, thx for insights.

    But stocks are theta free, while ITM calls sometimes may be costly, which changes whole concept of trading non-trending market.
  7. Why not hedge stock positions by selling calls/puts? You save on margin requirements; also, even in a nontrending market you could make money from premium.
  8. ChrisM


    Agree, but then your range of profitability is relatively narrow comparing to delta neutral.
  9. You could lift the hedge when market conditions change from a nontrending market to one with an established trend. Along with the adjustment in market conditions you can employ the delta neutral strategy.
  10. ChrisM


    And this is exactly what I am thinking of. Can you make a bug doing this ?
    #10     May 12, 2003