Is being delta neutral worth it?

Discussion in 'Options' started by ScottDamashek, Apr 14, 2003.

  1. Let's say you want to make a straddle. The delta of your call is .75 and costs $2.00 and the delta of your put is -.25 and costs .50 cents. To set up your straddle, you need only by one call and one put for a total of $2.50, but you wind up with a bias position of .5 delta (long 50 shares if you did one to one). If you want to be delta neutral, you buy 3 puts to 1 call, but now you're straddle costs $3.50 - and that's a 40% increase over $2.50! It seems to me that if you make a delta neutral trade, your breakevens are much further apart then if you simply bought 1-to-1. Am I doing this right? If I am right, why would anyone (aside from someone managing a huge position) want to be delta neutral?
  2. Natenberg's book deals with delta neutral trading ...

    One of main reason is to capture skew/smile inefficiencies w/o regard to underlying directional move.

    Maybe a judgement call on absolute vol levels as well as relative vol levels between strikes, bet months.Maybe arb opportunities?
  3. nitro


    Last time I talked to Shelly, he told me that the bets option traders were the ones that had the best feel for the direction of the underlying, i.e., the best equity traders.

  4. I guess diff strokes for diff folks. The few guys I know who are retired below 40 are delta neutral traders 50- up on the futures pits in NY, get an edge then hedge. BUT... if I were to be either one I'd rather have a good underlying feel, since one can set up asymetric ratios to really pump up the ROI !
  5. maglia rosa

    maglia rosa Guest

    To get a straddle to be delta neutral, you should in your case just sell stock against the long delta straddle, in your case sell 50 shares. You would rebalance the delta, in order to remain delta neutral, as stock, vol, time etc change. Another idea might be to just choose find the appropriate strike where call delta = put delta = 50d.
    On another token, for this strategy, being long gamma & vega, but flat delta, you could, instead of buying the straddle, so call & put, just buy one of them, call or put, and then sell or buy stock against to be flat.
    Ratio-ing the straddle to make delta neutral kind of becomes redundant with this method.
  6. Is buying odd lots better? Let me elaborate: If I buy 1 share of a stock when it is trading at 25.49 and it drops to 25.00 I only lose 49 cents plus commission. Had I bought 100 shares, I would be out 49 dollars! Why would anyone (except big hedgefunds) want to buy more than one share?
  7. maglia rosa

    maglia rosa Guest

    Also, your way of comparing, with 3.50 vs 2.50, you are sort of missing the point, since for 3.50 you will be buying 4 options rather than just 2 options for 2.00. That's double the vega, gamma, theta etc, so you can't just say it's 40% more.
    Also remember that a call is a put and a put is a call (from put-call parity). From what i mentioned in the first post, you could be buying 2 calls for 2.00, paying 4.00 and sell 150 shares, or you could buy 2 puts for 0.50, paying 1.00 and buy 50 shares, which gives you the exact same position of long 1 synthetic straddle and a remaining stock position to make your position (temporarily) delta flat.
  8. being Delta Neutral helps...

    ..the volume in the options markets
    ..the floor traders with more customer interest
    ..helps those who trade statistically and mathematically
    ..helps just about everyone but yourself

    trading options is like reaching for punch from the punch bowl....
    1) if you're the server, then you can handle the laddle, choose how much to fill the cup up with or not

    2) if you're the guest sitting in your chair, then you have to take what you can get

    3) if you're the child sitting at the table, you get to see the inefficiencies in being the quest....

    certain things work from the relative distance you are from the action...

    Delta neutral trading works best for those on the floor and other professional traders, who use that method as a hedge for their other positions....