delta-neutral trading

Discussion in 'Options' started by nugya, Jul 12, 2002.

  1. nugya

    nugya

    Hi Chisel,

    I was always told to keep away from thinly traded options. Could you explain the idea behind it.

    thanks
     
    #31     Jul 15, 2002
  2. nugya

    nugya

    Hi Trajan,

    Thank you for your contribution

    For the records, I am trying get Cottles book but Amazon says it is out of print, so i' ll have to wait for that.

    I have done some butterflies and have July QQQ 25/26/27 calls at the moment. When i do butterflies I would like to do them for credit.(buy/sell shorts and longs at different times)

    I will study your IBM example tonight.

    You mentioned working for a bank. Do they ever use indexes of different markets e.g DAX versus Nasdaq or Nasdaq versus FTSE
    etc to be delta-neutral or non directional ???

    good luck
     
    #32     Jul 15, 2002
  3. chisel

    chisel

    Nugya,

    Trading thin options can be very profitable because you should be able to get a big edge, but you may have to hold the position to expiration. That's where the risk lies. If you need to get out of the options, you may not be able to without giving up an even bigger edge than when you entered.
     
    #33     Jul 15, 2002
  4. Trading options on and off the floor for over 12 years, I have come to the conclusion that delta neutral just means your risks are at a different stock price. Usually, when stuck in long premium, we would have to play deltas to pay decay. I have found that being short the front atm and long late dated wings is the preferable position. Near term decay seems at best a break even position. When the stuff hits the fan, owning vega will pay for any st losses in gamma. Hopefully, your scalping as well as the bid/ask spreads will cover your risks. Of course, there are times to load up as well as time to flip your position. These are the trades that make the great ones great. Timing is usually of the essence.:cool:
     
    #34     Jul 15, 2002
  5. You asked about delta neutral strategies. Here is one of mine.

    I look at the overall delta position of my option portfolio. (I use OptionVue to do this). In short, all of my positions are converted to a "QQQ-equivalent" position. This gives me a Portfolio Delta.

    If my position gets significantly delta short (which has been constantly happening in this market), I will balance it, not by buying QQQs, but rather by buying what my scans show to be "under-priced" equity calls, or by selling "over-priced" equity or index puts (often the OEX).

    Has this been a successful strategy? Yes.
     
    #35     Jul 18, 2002
  6. Hi Windsufer.

    When you say QQQ equivalent delta do you mean getting the $ amount of your portfolio and mapping it to qqq?

    Example - if you are long (as measured by delta) 100 abc and long 100 def and 100 xyz and the total $ amount of these "300" shares is $10,000 do you then equate that with being long 400 qqq since $10,000/$25-qqq last) = 400 shares of qqq?

    Thanks
     
    #36     Jul 18, 2002
  7. GATrader wrote:

    "When you say QQQ equivalent delta do you mean getting the $ amount of your portfolio and mapping it to qqq?

    Example - if you are long (as measured by delta) 100 abc and long 100 def and 100 xyz and the total $ amount of these "300" shares is $10,000 do you then equate that with being long 400 qqq since $10,000/$25-qqq last) = 400 shares of qqq?"

    My reply:

    The OptionVue formula takes the beta of each underlying into account. For example, a gold stock may move inversely with the QQQs. It attempts to allow for this. I have to sometimes adjust when the numbers don't look right.

    What you propose should give a good approximation if the equities are similar those in the Nasdaq 100.
     
    #37     Jul 18, 2002
  8. nugya

    nugya

    Hi windsurfer,

    Thank you for sharing your strategy with us. As you are using different underlying as part of this strategy, do you have to use naked positions as well. If so aren't you taking big risk?Also how about the margin requirements???

    I would also appreciate if you could give real position example you have done in the past.

    thank you
     
    #38     Jul 18, 2002
  9. Yes, in this strategy, I start with straddles- buying the "undervalued" and selling straddles- usually in the index most "overvalued" (usually the OEX). I have to know the Portfolio Delta to calculate how many. For example, my notes from June 17 give an example of one of these trades: I was short 8 OEX to offset long 20 JDAS plus 20 SMH plus 10 EXPE and 20 PSFT. (I exited this in stages- I'm not in any right now).

    You ask about risk- the risk is that the OEX would have moved comparatively more than the others- back then it didn't. (Right now, it could be a problem). :)
     
    #39     Jul 18, 2002
  10. nugya

    nugya

    Are these CALLS, PUTS or STOCKS???
     
    #40     Jul 18, 2002