Hi, here a newbe from the Netherlands with some questions. I am gamma scalping straddles in RDSA (Royal Dutch Shell) and delta neutralising this mainly with options. The underlying stock had quite a ride to the upside. So I bought some extra puts and sold some calls and stock to neutralise the extra delta's. I am trying to create some rules of thumb to maximise the profability of my scalps and to prevent to pay to much for the options. I hope you elite traders can help me think in the right direction. Questions: 1. When I buy put options to neutralise the accumulated delta's, when the underlying is going up, which put options do you prefer to neutralise the delta's, OTM/ ATM/ ITM/ deep ITM and why? (volatility goes down with the higher put strikes, so my gut feeling says ITM and deep ITM put options are cheaper volatility-wise, but maybe there are other considerations) 2. When the underlying goes down again, do you sell the same put options (only now deeper ITM) or are you shorting lower strike ATM put options (due to a higher volatility?) 3. How do you evaluate if you are going to scalp by shorting stock, buying a put or shorting a call? (do you keep a certain ratio of call/ puts and stock in your portfolio, do you calculate theoratical value versus ask prices option prices and looking for bargains or is the volatility and vola skew at the specific moment your main point of interest, for example vola is below 30 days historical or skew shows that strike .. is underpriced) 4. How do you prevent, when the underlying goes up all the time, you stick with a lot of deep OTM put options, sold almost all your ITM call options and shorted a lot of stock? (for example do you swap your OTM put options to higher strike prices when neutralising the delta's or other suggestions?) A lot of questions, but i hope you can help me out!
It really depends what you are trying to accomplish. Trading more options costs more bid/ask spreads. It also changes your gamma and vega along with your delta. Options to hedge delta is usually a professional's game because of trading costs, etc. Deep itm are usually the most expensive to trade. Probably best way to lock in gains is sell some of the calls that you are long, or sell the outright. Any suggestion is entirely dependent on your goal.