Short Straddle Hedging using Underlying

Discussion in 'Options' started by belmisof, Dec 10, 2011.

  1. belmisof

    belmisof

    Hello,

    I'd like to know if anyone already tried to hedge a short straddle using underlying? If so, was it efficient?
    I know it can be hedged using Iron Condor or long butterfly but for 1 or 2 day max maturity, one could use the underlying instead... no?

    Merci
     
  2. It's efficient when the UL cooperates. See "Gamma Scalping".
     
  3. belmisof

    belmisof

    Hello thanks for the answer! What do you mean by the UL sorry?
    Does an appropriate short straddle hedging on 1 or 2 days to maturity be done using gamma scalping concepts? I must be certainly wrong or maybe very naive but can it be done "simply" by tring to be long above the strike or short below it on the underlying for the same notional? :confused:
     
  4. UL = underlying

    Yes, appropriate short straddle hedging on 1 or 2 days to maturity can one be using gamma scalping concepts.

    Yes, it can be done "simply" by tring to be long above the strike or short below it on the underlying for the same notional?

    :)
     
  5. belmisof

    belmisof

    Merci beaucoup!
     
  6. belmisof

    belmisof

    A guy on a french forum told me that the way he hedges a short straddle is not by hedging the UL because it can be difficult and costly in case the market goes up and down the strike.
    He said instead that he delta hedges the straddle and that if the market goes up he goes long a little put in case of a wide swing.
    Sounds good to me, what do you guys think?
    PS: delta hedging a straddle is as difficult as hedging the whole notional in case the market goes up and down, so where is the point?:confused:
     

  7. The point is you are Dynamically Hedging, it might look like churning the account but Dynamically Hedging sounds so much better. More info on Dynamically Hedging is on this thread: Short strangles on stocks
     
  8. It works if the stock swings back. As his buying back his put will have been a good trade. What about if the stock continues to rally. It's similar to delta hedging with stock except he's also buying some local gamma back as well and paying more in transaction costs (per unit delta anyway).
     
  9. belmisof

    belmisof

    Thank you for the answer. After trying it I believe that staying delta neutral causes less losses than playing with the notional.
    The only fact I'm not sure about is how often do I need to intervene to remain deltra neutral (1 day to maturity, USDZAR), every 50 pips difference for example?