Not a real trade but was wondering how options players adjust their position in the following scenario Long 900 RVBD at 33.88 Long 21 RVBD May 34 puts = -900 deltas. (purchase price 2.90) delta neutral straddle I suspect a big move in the stock by may 2011 expiration current(not the move I am looking for yet but stock fell to downside) RVBD falls to 32.43 Puts are at 3.40 position delta = -255 deltas Do you sit tight, or correct the deltas by 1. selling off some puts 2. going long more stock 3. buying some calls 4. sitting tight - when do u take action? sorry if this is moronic, I am trying to get my head around all this while I am reading Mcmillan 11blade
The point of gamma scalping is to profit from the stock movement in either direction and to some extent, IV change. In that context, the short answer is that I'd add some positive delta. But doing so (or anything else) isn't always the best thing to do because you have no clue what is going to ensue The perferct scenario is a multiple zig zig price pattern where you adjust repeatedly, continuously booking small profits. Opportunity loss occurs when you scalp early and miss the big move or target a larger move and get nothing but time decay because the gyrations are smaller. And then there's the continuous scalping that occurs in a big move (up in your case) and you end up with a nearly worthless option on one side as you run out of inventory on the other. Then, without reversal, time decay erodes what's left which s*cks. IV increase is great for a long option position but really adds to the misery if it declines. In order to offset it somewhat, I'd look toward selling some just OTM premium for rebalancing. I can't give you any magic formula because the position changes with every adjustment, particularly when you add more legs. None of this may be relevant to you since you implied that you're looking for a large up move and gamma scalping will diminish your take should you get that move quickly.
Spindr0, Thanks for the reply. If I understand it. You are saying that if I am waiting for my big move, then add the deltas and get back to neutral. Otherwise if I expect it to zig-zag, book the profits by subtracting the deltas(or the profitable leg). in the first case - IV will increasing benefiting my long option positions. in the second case - IV is decreasing so book the profits as the position erodes.
Yes to all with some fine tuning. If your expectation is a big move up, certainly, add the long delta because if you don't, you'll spend the next $1.60-$1.70 (or so) of an up move making up the drop plus the decay incurred during the elapsed time (assuming no IV bump). If you expect a downmove, best to hold off on adjusting delta since it will be a drag on the dropping position. You have nearly $6,000 of premium rotting away as long as RVBD goes nowhere. Personally, as RVBD drops, I'd lean toward selling some OTM puts to add long delta and reduce the effect of theta (don't get carried away because that creates verticals and reduces the stock hedge).. That opens up another can of worms if RVBD drops big time. The simple answer is that options involve tradeoffs and moreso with gamma scalping. An imp't point - you must have a low commission rate to have a chance at this. $8 flat fee stuff is a non starter.
his later books other than the 1st-options as a strategic investment deals with scalping gammas in greater detail thru use of options with underlying and the +- of each approach. There are tons of articles on the web about gamma scalping as well.
Well RVBD preannounced a great quarter and is set to spike 15% up after hours RVBD is up about 4 dollars. of course the damn thing drifted down from 34 to 31 over the last couple of days and then spiked 15% putting me 1 dollar above the straddle price. (not where I was hoping) not only do you have to call direction and extent but you have to time the damn thing too! adding deltas (selling the puts) to get back to neutral would have allowed me to book some profit and positioned me for the move up. learning.... 11Blade
Passarelli's text covers both types of delta neutral trades. Chapter 12. http://www.wiley.com/WileyCDA/WileyTitle/productCd-157660246X.html
As I mentioned previously, IV increase is great for a long option position but really adds to the misery if it declines. So if this was a pre earnings play, if IV was inflated and now contracts, you're going to see some add'l pain in your long puts. That's why IMHO, selling some puts is a better idea to adjust your delta than buying add'l shares. It shares some of the pain