Hello, I'm doing some mock delta neutral strategies using TOS simulator. I tried some a few weeks back but I was doing it on paper and with investopedia which was a disaster because of delays ect. Now that I have a proper simulator things are easier to see. Anywho, I'm wondering if anyone here has any experience with DN trading adjustment timing. What would be the best time and why? Early in the day, at the open, late in the day, at the close or sometime in between? I'm sure there is no set in stone answer as the adjustment is probably better determined by other variables but maybe there is a clear advantage set in stone. I don't know...
Andy, Regarding adjustments, see my reply to you on the other topic that you started: http://www.elitetrader.com/vb/showthread.php?s=&threadid=107583&perpage=6&pagenumber=6 I've done some delta neutral trading in the past, pretty much trading by the seat of my pants Small size, decent results but probably more lucky than good. Recently, I've devoted a lot of time, trying to get a better grip on what's going on. I've paper traded a lot and have taken a couple of small positions. I've concluded several things 1) Have some clear cut spreadsheets or brokerage tools that let you know exactly where you stand as soon as you input current prices and delta. 2) In very non techical terms, the more zig zaggy the stock, the better. 3) Watch that Implied Volatility. It's a big bonus when it goes your way and a thump when it doesn't. And FWIW, I'm not one of the pros that you find many of here. I'm just a reasonably knowledgeable every day retail investor trying to do better. So take my thoughts with a grain of salt
Thanks for the reply, spindr0. In response to #1, I've been able to use think or swim's tools to generate profit loss charts to the day with great ease and they have a good simulator to analyze a trade before adjusting if for real. #2, The zig zagging you're talking about would be desirable if you're long and not short, correct? #3, Same for number 2. It's good to be DN short position when IV is high and DN long position when it is lower, correct? It seems the biggest problem is dealing with bid ask spreads and fees. What is the lowest fees realistically possible for retail guys and where would one find the smallest bid ask spreads? Other than that I have the flexibility in my schedule to baby sit positions all I want. Thanks
I use ToS analyzer and basically I initally adjust every 100 - 150 deltas but after a while I still analyze the stock price chart and let it run to an extent. So if I am at 0 and then +150 I may short 150 shares to get to zero and then wait for next move to an extreme over or under 100 or so. This is very subjective and I adapt as the underlying moves as well and vols change.
Thanks for the replies. Yes, I'm finding that it is something not really written in stone but something I will have to do on an individual trade basis with it's own characteristics. Coach, do you usually take long positions like this or short? In your post were you referring to long, short or both? I'm trying to understand the difference between adjusting long and short straddles/strangles ect. If I understand correctly the adjustment allows you to take profits that are there for the taking with long positions but how do adjustments effect the short positions? I'm basically trying to understand what exactly it is that will make a position gain or lose in short/long DN straddles/strangles and how the adjustments come into play.
Yes, the zig zagging I'm talking about would be desirable you're long. I'd rearrange #3 and say it's good to be long delta when IV goes higher and it's good to be short when IV goes lower. I don't think that the level matters if you get the change right. Smallest B/A spreads tend to be on options closer to the money and on more liquid options. ITM's tend to be wider. I don't think that's the biggest problem. I think IV change hurts a lot more and any move (if you're short) that forces you to adjust can create problems with a reversal if you're short or an ongoing move if you're long.
I just want to clarify about #3, so I'm not confused here. I meant that it is better to go long when the IV is lower and has a chance to increase and to go short when IV is already very high and may go lower. Very high IV inflates the price of options and shorting options with high IV could be profitable if an IV contraction occurs which could suck out some premium for you, correct? And what problems can occur that you were talking about with the adjustments and a reversal if you're short or an ongoing move if you're long? Thanks
Give me enough time and I'll confuse both of us Yes, "It is better to go long when the IV is lower and has a chance to increase and to go short when IV is already very high and may go lower. Very high IV inflates the price of options and shorting options with high IV could be profitable if an IV contraction occurs which could suck out some premium for you." Here's my previous statement that seems to be confusing: I'd rearrange #3 and say it's good to be long delta when IV goes higher and it's good to be short when IV goes lower. I don't think that the level matters if you get the change right. As an example, LLTC has a low IV (25-ish) and is in the low end of its 6 month IV range (25-30). Its IV is low and might have a reasonable shot at going up. But to where? 30? OTOH, 3 weeks ago, SINA had an IV at the top of its annual range (50). Because of the action in the Chinese stocks and SINA was going into earnings (yesterday), its IV rose 20 BP's or so. So in terms of being long delta, buying the low IV LLTC would have gotten you nowhere. Buying SINA despite its high IV was well worth the effort. My other previous statement: "I think IV change hurts a lot more and any move (if you're short) that forces you to adjust can create problems with a reversal if you're short or an ongoing move if you're long." Suppose I'm long the straddle. Price moves up. I short shares. It moves up more. I short more shares. Suppose it's an extended move and I end up with a deep ITM call with a delta of 100 and 100 short shares? If it never reverses and drops, I own all the time decay and assorted other losses incurred along the way. Suppose you're DN short the straddle. If price moves up enough to make you uncomfortable. You then have to either reduce the call delta (buy back for loss) or add short put delta (sell more while adding more risk). You do that and now XYZ drops back to the starting point. Now you're unbalanced (-DN) and you either have to hang in there or reverse the process. Whipsaw! Perhaps someone here who has a better command of the Greeks, etc. can explain this more clearly and more technically.
I have done it mainly going long the straddle and shorting or going long the stock to flatten deltas and then daily monitor the chart. For me I prefer going long the straddle when IV is low because for me the bigger risks of a stock position are sudden gaps or a few days of strong moves and owning the straddle lets me not worry about that. The stock could go nowhere of course but that is a slow bleeding death and easier to deal with over time if I need to bail. I look for stocks with low IV relatively, perhaps low IV compared to statistical IV spike, an upcoming catalyst, and a stock that is know to have some moves. COST was a recent example where IVs bottomed out and earnings were 3 weeks away with history of nice moves on good or bad news. I do this rarely as good opportunities do not present themselves always and I am lazy to search for them daily. When deltas go + or - 100 I short or go long stock to flatten and revaluate every day. This is something I will do when an oppty presents itself, I do not recommend this as a portfolio strategy or putting a ton of of your portoflio into it. If you load up on a ton of these positions you will just churn your account. Wait until sweet looking oppty comes around and do it sparingly.
My view here is where the individual skill comes in. Using the ol COST position as an example. I went long the 57.50 straddle when the stock was trading around that amount and short a bit of stock to flatten the deltas. As the stock meandered up to $61 I shorted stock periodically to keep deltas flat and readjust the position. On a few sell offs I covered shorts when deltas got realy negative and pocketed some stock profits which adjusted my risk curve. Then as COST popped back to over $61 and the position got +delta, the chart looked bullish with earnings a week away so I left it alone and let it accumulate positive deltas as the stock moved higher to $63 or so. When earnings came and it popped to $69 I closed for nice profit. If I ignored the price chart and my own bias I would have shorted more stock and reduced my chances at a profit. I know the key is to balance deltas but if the stock starts breaking out, let the straddle do its thing as the long option deltas will outrun the short or long stock you acquired along the way to balance initial deltas. This is the individual touch so to speak, putting your bias in as the stock makes a move. If I was wrong and the stock snapped back in a few days, what I really lose is some theta and the position will again go flat deltas from + or might go negative and perhaps I take some shorts off or continue to reevaluate. THis is why I do it occasionally or rarely when I get a nice situation and do not just blindly do it on as many stocks as I can.