thank you all for your comments.. So far no body has come up and said that delta-neutral trading is great and they are making steady constant money. Posters of this thread who used delta-neutral trading, always used past tense meaning that they have given up on it. Any body out there who is on the side of delta-neutral trading please lets us have your comments???? good luck to all
Good comments by Chisel ..... I dont try to be a delta-neutral trader. I agree with Chisel that it is difficult to do this off floor. In fact for myself I have not detected many good opportunities for this approach. When we first started the IOM at the MERC - I was there the first day - the challenge we had was to keep the markets reliably and fairly priced. This was not a purely electronic task. In the beginning it was possible to trade a delta-neutral strategy on floor but as time went on this became more difficult: we enhanced the mechanisms for setting and gauranteeing a market. Today, in the more or less purely electronic markets, I have yet to find many good opportunities for this approach: I am still a bit new to electronic off floor options trading so perhaps with a bit more research I will amend my position ......
I am a little confused about what your trying to get at here. First of all, a good trader doesn't listen to other traders to find out what works, he finds out what works himself. Second, I could tell you that delta neutral trading is the most profitable trading style ever and you could proceed to lose your house using it. From your posts I take it that you are a fairly new trader. If this is the case, I really think you should be trading stocks only and in the meantime read everything you can on options and maybe paper trade them. Options are very very complicated. You need to understand volatilty forward and backward, not just how its calculated mathematically, but how it moves and changes with the market. You need to understand the vol skew and why that happens. You need to know why market makers juice the premium. You need to know the relationship between statistical volatility and implied volatility and why those two trade at different levels. As far as deltas go, you need to know what delta bleeding is. You need to know the relationship that delta has to time, to volatility and to price. You need to know the difference between standard delta and true delta. You need to know what CEV (constant elasticity of volatility) is. Then if your going to trade delta neutral you need to know what gamma is. You also need to understand the gamma of the gamma which is the second derivative of gamma. Also volatility has a second derivative, the volatility of the volatility. You also need to know what the alpha is which is gamma's relationship to theta. You also have to understand what stochastic volatility is and how it is different then regular volatility. Now if you are saying to yourself why is this guy writing all this stuff, all I asked about is does delta neutral trading work. The answer is there are 100 things you need to know about options before you can make it work. Its not as easy as just saying buy straddles. I hope this post made you realize that options are not as simple as Wade Cook trys to sell them to the public. There is a very good reason why 95% of the people who trade options lose money. It's because they are asking if such and such a strategy works and they use it like a one size fits all strategy. I honestly think that you personally Nugya can make much more money trading stocks then options. You do not understand them so just stay away. If you want to be market neutral try pairs trading. Try buying stock X and shorting Y and looking for a correlation between the two. I think you will be far better off. Options is a zero sum game unlike stocks. That means for every winner there is a loser. And I will bet right now if you are ever on the other end of my trade you will be a loser. It's the top 5% that take the other 95% money. And the more seminars Wade Cook does, the richer we get. I hope this brought some perspective to your trading.
Just a quick note on Mavericks post: Unless you are trading and managing risk for large portfolios, you will probably limit you view to a few basic strategies and limit the mathematics to basic indicators: You need to know the basics like understanding the factors behind the premium determination etc. You also IMHO need to have actively paper traded a couple of option markets - different underlying instruments - to have enough of a feel for how to construct your own trading approach. I do agree with Maverick: If you are a new trader, options are not the place to start: you should contemplate adding a strategy or two as you get further along in trading and only after you have done your homework.
Hmmm, thank you for your comment but it is not the answer I was hoping for; you wrote: I am a little confused about what your trying to get at here. First of all, a good trader doesn't listen to other traders to find out what works, he finds out what works himself. I say: I thought we are all hear to exchange ideas. You wrote: Second, I could tell you that delta neutral trading is the most profitable trading style ever and you could proceed to lose your house using it. From your posts I take it that you are a fairly new trader. If this is the case, I really think you should be trading stocks only and in the meantime read everything you can on options and maybe paper trade them. Options are very very complicated. You need to understand volatilty forward and backward, not just how its calculated mathematically, but how it moves and changes with the market. You need to understand the vol skew and why that happens. You need to know why market makers juice the premium. You need to know the relationship between statistical volatility and implied volatility and why those two trade at different levels. As far as deltas go, you need to know what delta bleeding is. You need to know the relationship that delta has to time, to volatility and to price. You need to know the difference between standard delta and true delta. You need to know what CEV (constant elasticity of volatility) is. Then if your going to trade delta neutral you need to know what gamma is. You also need to understand the gamma of the gamma which is the second derivative of gamma. Also volatility has a second derivative, the volatility of the volatility. You also need to know what the alpha is which is gamma's relationship to theta. You also have to understand what stochastic volatility is and how it is different then regular volatility. I say: I have been trading options last 3 years successfully(my own little way)Ok you made your point you know quite alot about options!!! You wrote: Now if you are saying to yourself why is this guy writing all this stuff, all I asked about is does delta neutral trading work. I say: i have been thinking of that since your first post when you told me to go and read some book You wrote: The answer is there are 100 things you need to know about options before you can make it work. I say: Ahh Almost answer my question.So delta-neutral does work???? you wrote: Its not as easy as just saying buy straddles. I hope this post made you realize that options are not as simple as Wade Cook trys to sell them to the public. There is a very good reason why 95% of the people who trade options lose money. It's because they are asking if such and such a strategy works and they use it like a one size fits all strategy. I say: I dont know about Wade Cook bit but i agree with rest You wrote: I honestly think that you personally Nugya can make much more money trading stocks then options. You do not understand them so just stay away. If you want to be market neutral try pairs trading. Try buying stock X and shorting Y and looking for a correlation between the two. I think you will be far better off. I say: Wow, I only posted few message and from there you gathered all that information about me. You are great and thank you for your confidence in me that i can succeed in pairs trading you wrote; Options is a zero sum game unlike stocks. That means for every winner there is a loser. I say: I have no comment but i think some people will this disagree with that You wrote: And I will bet right now if you are ever on the other end of my trade you will be a loser. It's the top 5% that take the other 95% money. And the more seminars Wade Cook does, the richer we get. I say: that is something we will never know You wrote: I hope this brought some perspective to your trading. I say: brought some perspective to my trading?????Hardly.Just made me wonder though why some people are so negative and angry towards other people. Is it because I refuse the buy the book You recommeded???? Finally: I am here to exchange ideas not to have dog fight with somebody I dont know. So please if you want to contibute pls do otherwise please do not post to this tread. thank you and good luck(although you dont seem to need it)
In a zero sum world, I have no doubt that is true. However, derivatives aren't as zero sum as people would suggest. Very good traders make trades which, superficially, don't look good. After all, where would Timberhill be?
Nugya, If you're on the floor, delta-neutral trading is definitely a money maker if there's plenty of volume. Delta-neutral trading a thin options market can be profitable also, but there's more of an art to it. Delta-neutral trading is just getting the "edge" on an options trade and then laying off the directional risk using the underlying. The "edge" is buying below fair value (the bid) and selling above fair value (the offer). In today's markets, I would never trade delta-neutral without a computer program that tells me the fair value of the options, and I would also require a position analysis program that tells me my skew risk, vol risk, theta, p/l on an up or down move, etc. I think option trading off the floor can be profitable, but it's more due to correct assumptions about the future or being a good scalper around the option position e.g., than getting the edge (which can be very tough off the floor). HTH.
This is just a guess, but, I think you are looking for a magic bullet. It doesn't exist. Your question has been answered many times. The reason people say to go read Natenberg and Cottle is that they don't want to write a book on this website to explain every single dynamic of these instruments. I have tried to explain these things to people over the years. I could offer mathematical proof and, yet, they would still ignore basic premises of options.
Hi Trajan, Thank you for your post. Actually I am not looking for a magic bullet. I know that risk=reward so, no risk no reward Also i know that if there was a magic formula there , It would not mentioned on forums like this. If there was one, do you think Natenberg and Cole would put the magic formula on their book??? I aggree with some of the posters that nelta-neutral trading is loaded term which could cover alot of thing. If you look at my first post I am actually saying "delta-neutral or any other non directional trading".Pairs trading is also non-directional trading which can be used many ways. I was hoping to start a diccussion where several of these non-directional strategies could be discussed. I think I am failling on that!!!! Best wishes and good luck
My impression was that your question was very broad. It would have been better to ask, "what are some effective delta neutral strategies." You still would have gotten back that delta neutral is a loaded term. A stock could move 20% and your deltas could go positve to neutral to negative back to neutral. This is why people emphasis reading Cottle. He disects positions to help you understand where your risks is. When you trade delta neutral, you still take on significant risk. The other greeks become more important. That is why Maverick74 wrote what he did. You don't need to go as far as he suggest. WTF is the fourth derivative of an option? I have no idea. The minimum probably lies somewhere between Natenberg and Cottle. There are people on the floor who would stuggle with Natenberg and, yet, still make a boatload of money. They make money by buying on the bid and selling on the offer. Have you ever looked at trading butterflys? In the era of $1 commisions, many strategies have become viable. They aren't completely delta neutral, but, can offer pretty good risk reward in a high IV environment like now. You would have to trade a liquid stock where you could leg into parts of it. Otherwise, the spreads would kill any perceived edge you get. To explain how to trade it, would take a book, like Cottle. It explains how to make a straddle into a fly. To a professional option trader, calls and puts are same thing, another thing covered. By understanding these relationships, you would be able to leg into spreads at better prices because there are more markets to scan for price discrepencies. We discussed flys here: http://www.elitetrader.com/vb/showthread.php?s=&threadid=6670 I would resuggest my idea of buy a call spread and selling stock delat neutral. You could even do a ratio and sell stock. Buy 10 IBM July 70c and sell 12 75c and 300 shares of stock leaves you delta neutral for a debit of 1.40. Stock down five points, you make 100 bucks, up five points, $1300, unch, your out your 1.40. However, you would trade around it for the next week, scalping gamma. To be really honest about it, I would do it at ratio of 2 to 1 or 2.5 to 1, f^&&, maybe 3 to 1, all within a larger position. This means, I would have a larger position and am simply adding exposure to it. I would then trade the 70 as a straddle for intraday scalping. For risk, I would leave them all in. Intraday, I wouldn't worry about them till the stock got to 72 on monday or tuesday, 74 for the rest of the week. As the stock approaches 75, I would aggressively buy that line in. Then repeat the process around the 75/80 call spread. Why does this work when you seemingly have a lot of naked exposure? IV is at 50. If the stock rallies, this will drop, plus, the options are rapidly decaying with only a few days remaining. On Thursday, with stock at 74, what would the 75 calls be worth? .50, .60 or .70. Your big risk is the gamma explosion around 73. It can be managed. Could the stock gap up 10%? Sure, lets look at what the P/L would be at 77(3:1), +1000, at 80, -5000m, it gets worse from there. IBM has a recent history of making significant gaps, so, the risk is real, escpecially with an earnings release this week. The earnings release actually changes some of the stuff above. I didn't realize that until now. I would definitely cut the ratio down if the stock could gap up 10% through the 75. Still, it is within a larger position, so, you never know. I could be long a bunch of premium in the back months. For a straight position, I wouldn't go much above 2 to 1 and trade it the same way. When I traded for a bank and didn't have to worry about my haircut, this was my preferred strategy. The stock I traded was not very jumpy. It worked. Trading IBM was a different story. Because of haircut, it seemed I owned these piece of shit calls all the time.