How to determine Deltra neutral price?

Discussion in 'Options' started by cb2301, Jun 30, 2012.

  1. cb2301



    If I am buying a Strangle on a stock. How can I determine the delta neutral price for this strangle?

    For example, on AAPL

    Current Stock price: 584
    July 12 605 CALL: $4.37; Imp Vol 21.1; Delta .254
    July 12 565 PUT: $5.45; Imp Vol 23.1; Delta -.286

    What would be the delta neutral midpoint for this trade?

    Thank you for your help!
  2. 584.36

    Why would you want to buy a strangle? The delta will change as the price changes. Where do you want your "sweet spot" to be?

    It's against my religion to buy a strangle. Buy Straddles and sell strangles otherwise just take a directional trade.
  3. cb2301


    Thank you very much for your response!!

    May I ask how you calculated 584.36?

    Also, when buying a strangle - (assuming volatility doesn't change) is cheapest point to buy a strangle is buying at a delta neutral point?

    I am relatively new to option trading strategies, so i am evaluating different trades. Your Idea to buy a straddle and sell strangle does make sense and I am incline to try it.

    Thanks again
  4. I have no idea how vol effects apple options I'm strictly a futures trader. But there is no such thing as a free lunch if vega don't get you theta will eat you up.

    TOS allows you to analysis the risk profile of any possible scenario.

    Looking at the profile if I had to give you an opinion I'd say 520 then 460. Why not just buy 500 puts and sell the 600 calls.

    When you say a delta neutral price do you mean you want to get out when delta becomes neutral or you want it neutral right off the bat and let the bias grow with the trend? Getting hung up on any one aspect of the option pricing model will only cause frustration.
  5. cb2301


    Thanks for your response again

    I was just using an example, I really only want to know how can I calculate a delta neutral price given the info I have.

  6. By linear approximation:
    Dc = 0.254 + Gc (S-584) Call Delta
    Dp = -0.286 +Gp (S-584) Put Delta
    where Gc and Gp are the Call and Put gammas

    You want Dc+ Dp = 0 hence
    S = 584 + (0.286 -0.254)/(Gc+Gp)

  7. cb2301



    Great!! thank you so much!

    Also, when buying a strangle - (assuming volatility doesn't change) Is cheapest point to buy a strangle is buying at a delta neutral point?
  8. With the same notation, let's define f(S)= Call(S,Kdown) + Put(S,Kup) and Sm such that Dc(Sm)+Dp(Sm) = 0 i.e. f'(Sm) = 0.
    Since f"(Sm) = Gc(Sm)+Gp(Sm) >0 then f(Sm) is a minimum at a given time!

    Don't forget the time decay at Sm for your strangle is also close to its maximum...
  9. cb2301


    Thank you!!