Should I adjust straddle legs when price moves?

Discussion in 'Options' started by xiangfin, Nov 12, 2007.

  1. xiangfin



    For QQQQ, I am holding a straddle including Dec. 50C and 50P since this morning. It was delta neutral when I established it. Now the QQQQ goes down to 48.73, so the put is ITM with bigger delta. Questions:

    1. Should I close the 50p leg, take its profit, and buy a new put leg like at 48 to make the straddle delta-neutral? I expect the QQQQ to go down more. Currently, my first objective is to offset my previous losses from other trades. Is there better stratigies than adjust the put legs?

    2. how you guys are playing the current market-index and stocks?

  2. If you are certain the Q will drop you should be -100% delta. So sell the calls.
    If you are certain it will rise you'd be +100% delta, so sell the puts.
    If you are not sure, you think it could go either way try to be 0-delta, so sell some puts or buy some calls, or move them to other strikes.
    In other cases adjust your delta to what you expect the market to do.
    Never let another part of your investment determine when to buy or sell, every trade is a separate thing, also going forward a previous loss must not determine your trading points.

    Btw. it is very hard to earn money with this long gamma-scalping, as it's called. In general the theta loss is not made up by the delta-swings and scalps. Once in a while you can make a big windfall, but for most this takes to long.

  3. spindr0


    Knowing what's best to do is based on knowing what the future will be. Since you can't know that, you have to decide based on the current numbers in front of you.

    If you have a profit and you want to book some of it, knowing that in return, you are giving up some delta, then roll the put down. If the market continues down, you won't make as much as if you had left the original position alone, but you'll still make money.

    OTOH, if you don't roll down and the market reverses big time to say 50 (like today), you won't have that booked put profit and you'll be back where you started, less the time decay.

    If your initial intent was to be delta neutral and still is, I would always book the profit... or buy enough QQQQ shares to get back to DN.

    Losses on other trades shouldn't affect how you manage this QQQQ position but IMHO, they should make you a bit more defensive about protecting gains or limiting losses.