Using index ETFs for delta

Discussion in 'ETFs' started by Eliot Hosewater, Jul 24, 2008.

  1. Now that there are long and short ETFs in the major indexes, is it legitimate to use opposites to adjust your deltas?

    For example let's say you have some combination of options in SSO (Proshares 2X long S&P500) that has a total position delta of +100. Would it work to buy 100 shares of SDS (2X short S&P500) to try to get delta neutral? I'm thinking it would be approximately the equivalent of shorting 100 shares of SSO.

    I'm thinking of situations where the obvious choice would be to sell some of the underlying which might result in naked short calls, but your broker won't let you do it.
  2. yayt


    Wouldn't that be a risk free way to collect call premium ?
  3. How would you do that?
  4. yayt


    unless I'm missing
    Something that should be obvious, if
    Your net delta exposure is zero then you would just
    Collect the call premium and happily get assigned
  5. cvds16


    you are missing a lot ! it doesn't matter what instrument you use you have to keep on adding the delta's to get your total delta, although with short ETF's you use negative delta, if you short 'short ETF's' you get positive delta, it can get confusing if you start shorting calls on your short ETF :D .
    Just remember you start with some base and work from there ... it's all very basic logic.
  6. cvds16


    think I misunderstood the original poster at first, but the answer is no, you don't create a call. Options can only be 'created' by dynamic delta neutral hedging. This position would have a gamma, meaning you have to readjust. The positions you talk about don't have gamma.
  7. I guess I didn't explain it very well in the OP.

    Let's say you put on a collar on SSO consisting of 1000 share of stock, 10 long Aug puts at 57 and short 10 calls at 61. Now th stock has moved to 61.44 today. TOS is showing me that the total position delta is 221.70. If I wanted to get the delta closer to zero I could sell 221 shares, but that would leave some of the calls uncovered and my broker won't let me do that.

    Can I buy 221 or so shares of SDS to neutralize the position?
  8. cvds16


    the short answer is yes, problem is you are really making your life difficult this way. The problem lies with your broker: they should let you sell the stock, so the real solution is, if they don't let you: find another broker.
  9. yayt


    cvds, I don't understand

    You are long:

    Long etf, 100 delta
    Long the short etf, "-100delta"
    In effect you have 0 delta in theory ,
    And then you write a call

    Can you please explain again why that wouldn't work ?
  10. cvds16


    your call has delta too
    #10     Jul 24, 2008