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# How to determine Deltra neutral price?

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

1. ### cb2301

Folks,

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
Strangle
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?

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?

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

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

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.

Anyone?

6. ### betcashrun

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)

Cheers

7. ### cb2301

betcashrun:

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. ### betcashrun

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!!

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