Balancing issues with delta neutral strangle

A

Aston01

I've been having a bit of an issue with long delta neutral strangles of late when the market moves up.

The position starts off as close to delta neutral as possible but as the market moves up the overall value of the position actually decreases. I dug into it a bit more and noticed that my put side has about a 23% higher cost basis then the call side, which considering puts have inherently higher IV makes sense.

Is it possible that whilst the position I am trading is technically delta neutral in reality has a negative delta skew?

BTW - even though this trade is being put on with weekly options I don't necessarily think that Theta is the overwhelming issue because this is occurring within 5-15min of taking the position.
 
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Aston01:
Your 1st two paragraphs make sense.
I do not follow your final question.
Is it your goal to maintain a "delta-neutral" position, after market moves from your originating position? Ie.. do you make adjustments to you position to maintain near delta-neutrality as the market moves?
If you plan to "manage" your position delta, it could be viable to consider adding back-month Call Debit spreads to manage your delta in presence of upward market movements. (back month can reduce the theta burn of the adjustment over some other forms of adjustments). The converse is NOT true for downward moves, however. (PUT debit spreads not ideal for down move delta maintenance).
 
cdcaveman said:
If the underlying goes up... Vol goes down ... Vol goes down your Delta drifts and you end up shorter then you thought
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That is kind of what I was thinking. It could also explain why the issue presents itself on upswings.
 
If you shared the actual position you would get specific answers. You may not have realized enough gamma. You might have a vol reset. You might have a skew reset. You might have a forward issue. You might just have a mark to market issue.
 
You are short gamma. You have to *sell* the side with the skew (here, Puts) or buy the other side to be able to scalp a hedged holding. Else you can't hedge- you will be killed on the day-to-day hedging even if your position ultimately finishes in the money- you will buy high and sell low until expiry. Short gamma trading is only for those with very deep pockets, because you really need to put the position on unhedged.
 
Aston01 said:
BTW - even though this trade is being put on with weekly options I don't necessarily think that Theta is the overwhelming issue because this is occurring within 5-15min of taking the position.
More...

The fact that you've specifically said this is happening so quickly after opening your trade, my guess is you're getting bad fill prices and are down almost immediately after opening the trade. This can be an issue with weekly options, especially when you try to force a position.

What ticker, and what strike?
 
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