At what point does a delta neutral postion unbalance ?

A

Aston01

Is it possible from a percentage change perspective to determine at which point one side of a delta neutral position begin gaining value faster than the other side could lose value?

And the second half of the question ... after a 50% decrease in value on the losing leg wouldn't the 100% percent gain required to get back to even make it more sensible to sell the losing leg and convert the delta neutral trade into a directional trade with a stop loss to prevent a rollback past that threshold ?

This is based on the assumption that you entered the delta neutral trade with the expectation of a big move in one direction of another to achieve profitability.

Percent decrease - Percent gain required to get you back to even
5% 5%
10% 11%
20% 25%
25% 33%
30% 43%
35% 54%
40% 67%
45% 82%
50% 100%
75% 300%
90% 900%


This hasn't been the easiest question for me to find an answer to so it you see room for improvement in my logic please let me know ...that's why I bothered to ask.
 
Quote from atticus:

omg, no. It's not linear.
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Please explain ... I am very comfortable feeling like an idiot if that's what it takes to get a better understanding.
 
Quote from Aston01:

Please explain ... I am very comfortable feeling like an idiot if that's what it takes to get a better understanding.
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Meaning you're not approaching it correctly. It would take some time to explain, but I have to run. Your method won't work with a convex vol-asset.
 
Delta doesnt change at a constant rate... The key here is gamma, it also isnt fixed so its a real hassle. I have not seen an easy way to predict delta change so far. IMO you are fighting an uphill battle...
 
Quote from heiasafari:

Delta doesnt change at a constant rate... The key here is gamma, it also isnt fixed so its a real hassle. I have not seen an easy way to predict delta change so far. IMO you are fighting an uphill battle...
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Does the situation tend to be more exacerbated in longer term trade (i.e. one where you hold the position days or weeks) or a shorter term trade ( i.e. position held minutes or hours) ?

And does opting for an OTM delta neutral position somewhat mitgate the issue or create even more of a problem.

BTW - Thanks for the feedback ...I know there are holes in my understanding and I am trying to make the effort to close some of them.
 
Quote from Aston01:

Is it possible from a percentage change perspective to determine at which point one side of a delta neutral position begin gaining value faster than the other side could lose value?
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There are lots of neutral delta positions. Can you give us an example trade?
 
Quote from Aston01:

...This is based on the assumption that you entered the delta neutral trade with the expectation of a big move in one direction of another to achieve profitability.
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Can you give us an example of this trade as well? Is this the same type of neutral delta position as in your first question?
 
Quote from Aston01:

Does the situation tend to be more exacerbated in longer term trade (i.e. one where you hold the position days or weeks) or a shorter term trade ( i.e. position held minutes or hours) ?

And does opting for an OTM delta neutral position somewhat mitgate the issue or create even more of a problem.

BTW - Thanks for the feedback ...I know there are holes in my understanding and I am trying to make the effort to close some of them.
More...

being long 100 shares of stock is like being long 100 deltas, so to hedge (get neutral) sell 2 at the money puts with .50 delta, so then you are long 100 deltas and short (-.50 x 2 = -100) deltas. This is a can of worms, the tough question is when to hedge; there are different ideas about when to effect a hedge, delta moves with price of the underlying. Think of them as chained together.

this article may help you......

http://www.optiontradingpedia.com/delta_neutral_trading.htm
 
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