Dumbstruck by the consequences of Delta Neutral Trading

j90 said scalp,the reason your neutral is to limit risk overnite or in a big move,when you are there you should be taking advantage of the move,lifting part of one side and putting it back out at a better price or taking off part of the other side at a better price

 

Hallo JJ90

Thanks for joining in.

You are correct yes:

If there are enough oscillations, we can scalp and cover spread and hopefully make a small little profit.

Alternatively if the market trends one direction, eventually cost are also covered.

Both these scenario’s I can simulate. The problem however lies in the assumptions.

For the first oscillations option, we need a LOT of them, trading currencies with the Euro for example, I would need 160 plus oscillations between 50 point intervals, that is quite a request !

For the trending option, to cover premiums, on Euro once more we need about 350 point trend to break even with the premium. Considering that Euro’s monthly average range is only 407 pips and the median is 361 pips, the chances are pretty close to 50/50 here also. I mention the median also because the average is a bit skewed to the high side due to NFP that hits it once a month. The stats cover a period of monthly data from 04/01/1989 to 02/01/2007.

I suppose what I am trying to get to is that sure Delta Neutral trading is probably one of the more “safer” or less risky ways to go about it, but the lack of risk is always accompanied by the lack of small or no return.

Now after posting here a bit and putting things into perspective for myself, I realize that what bothered me was that sure, initially we have a synthetic straddle with the option to scalp. But one would not know before hand to scalp or not to scalp because we do not know before hand what the range potential would be. If we went scalping and start selling off spot as the price starts to trend, and there is a good chance we end up with to little spot to pull our negative premium into positive ground if price only ranges round it’s average.

On the other hand, if we decide to hold on for the trend and basically play this as a straddle, we are betting directly against the monthly range. In the end, having both these choices does not seem to bring any more or less value to my trading arena. So my real question now turned out to be, what advantage would having these choices have. So far it seems like NONE whatsoever and gamma scalping sadly seems to be out of the question with regards to currency trading for me.

One thing is for sure, typing all this out here on the great forum helped me getter a better perspective – I suppose that is why people visit shrinks, they kind of heal themselves by talking and listening to their own summaries hahahahahaha

Best wishes,

Digital Nomad

 

Hi ammo,

Yes, what you say makes sense. It’s kind off having the foot on the breaks while the road seems dangerous and letting go a little when it is clear. Cost wise I suppose it would be no different than simply closing everything and reopening it all again. Then again, if the one side is always opened, and the other side is operated on, at least one saves the extra cost of not operating on both sides.

Also, this calls for the trader to take a bias towards direction etc. And this is the funny part for me because most of the books and blogs I have read, people cheerfully purport that Delta Neutral trading is the best thing since sliced bread and it allows you to be market “un-biased” etc. etc. From my own humble research the truth seems to be quite the opposite. You have to take some bet, if not in direction, then in volatility or time etc… no bet = no profit/loss.

There was this one forum where I asked questions in the same line as I did here, because this fellow was going on like he owned the market the way he was delta hedging this and delta hedging that. When I started to question the logic behind it all and how the odds related to true market potential, I was bluntly silenced.

So I made a conclusion that perhaps all this hype is just to get newbie’s into the game because they do not yet have all the facts to understand that one has to make some bet here.

Of course there must be people who make money trading like this, I’m just not one of them. Perhaps the secret lies in the market one is trading, the ratio’s etc… I don’t know anymore – I did try.

Anyhow, time to go place my bet on Euro for the day LOL

Best wishes to all !

Digital Nomad

 

MTE, I think you would agree that that is hardly a flaw of the position.

DN, just curious, was it trade2win.com?

 

Oh, sure, I didn't mean that as a flaw, just as a characteristic of the position and something to keep in mind when trading it.

 

Hi there,

No it was over here: http://tfc-charts2.w2d.com/forum/index.cgi/noframes/read/387899

Best wishes,

 

DN,

FWIW, maybe you are looking to delta hedge too quickly, before that gamma has developed enough delta for a reasonable profit.

I personally like to let a few deltas develop before hedging, if possible...but I very fussy about when i put it on (vol, strike considerations etc) The planets have to be in line.

 

Yeah, and the rest of us just blindly slap it on and go with the flow.

(Sorry, couldn't resist)

 

PMSL @ MTE

 

Hardee Har Har. May your gamma mysteriously flatline