when to do a delta neutral and gamma neutral?

Discussion in 'Options' started by johntsai90, Oct 21, 2009.

  1. Dear experts,

    I am trading option now, but i am just wondering when is proper time to neutralise detal and also gamma?

    My idea is to neutralise delta during the intraday when there is no turbenlance so i can keep earning time-value if the theta is positive.

    Any strategic view for this?

  2. If you have negative gamma, it's difficult to earn money by collecting theta when you spend lots of time neutralizing delta. You will be scalping for negative dollars.

    You should be delta and gamma neutral only when you do not want to be exposed to the risk involved with non-neutral positions.

    If your goal is collect theta, and not to trade a large number of different option series, you will have positions with negative gamma. They go together.

  3. Simply said : if you are in trouble, do not double !

    Delta hedging might rescue your wallet ! :)
  4. Thanks for your wonderful idea,

    just wanted to make sure how to exactly delta-gamma neutral?

    My goal is to collect as much as theta with around 10 positions
  5. another thing is my overall gamma is usually -0.00462 when delta is about 0.01.

    should this be like delta-gamma neutral?
  6. hidge


    Gamma is behaving as an opposite to theta,
    When your position is long gamma then it is short theta and vice versa.

    There for, when gamma is near 0 so is theta (it makes it near impossible to put time decay on your side with neutral Gamma).

    Just as a side note, options traders that looking to construct a "pure" Vega play which means betting on a change in the underline IV while minimizing the position exposure to the market will try to build a neutral delta & gamma position that will be less sensitive to the underline moves.

    You should take into account that neutrality is a constant adjusting mission, although gamma & delta neutral will make it a good start – you can be sure that your position would constantly change and will "lose" it neutrality due to the passage of time, underline movements and change in IV.

    Just my 2 cents,


    just wondering how does delta-gamma neutral strategy cope with the market when there is fast pricing?
  8. hidge


    Hi John,

    If you mean that fast pricing are strong or volatile movements in the market than my answer is the following:

    As a rule of thumb, the closer we are to expiration it will get harder to keep the neutral position and strong movements will kick the position far away from it (because gamma/delta changes aggressively).

    one more thing to consider:
    If the volatile behaviour of the market will increase the IV of your options ( it is likely to happen)than gamma will be relatively smaller than in the case of lower IV - fact that will help you to control your position in a smoother way.

    Hope I helped,

  9. thanks oded,

    any idea how to do it?

    my thought is to use scenario analysis in advance, and to select a few canadidated positions for neutralizing when the time is coming (fast market)

    or the worse, perhaps the best, is to liqudate all my position during the fast market

    Does the above actions sound right behaviour to responding fast market?
  10. Seems like indexes with smaller absolute prices would be best, but maybe this is presumptuous. SPY moves over a point a day easily. The qqqs much less. The qqqs seem like you would have to readjust the trade with much less frequency say if you were trading 50 share/1 contract lots.

    Anybody have pointers about succesfully carrying out this strategy? Seems difficult even with dollar commission rates.
    #10     Oct 26, 2009