Going delta neutral on stocks <10 bucks doesn't make alot of sense right? Seems like you'd be fighting to extract pennies instead of extracting dollars.
Delta hedging on teenies
- Thread starter ferrycorsten
- Start date
ok, take SIRI. underlying at 3.16. IV30 is 36.50 which is very low (17th percentile). let's zero in on feb 3 calls. last price is .20. IV is 33.22. say i believed vol in this 3 strike will jump to 50 this week. that changes the value of the call to .25. so a 52% jump in vol results in just a 25% increase in the call. to me that seems low and i wondered if this is because these options are "teenies".
basically i'm wondering if it's worth it to go delta neutral on an underlying like this.
teenies are not called teenies because of there nominal price... just because its .20 cents doesn't mean its a teenie.. typically to me that means deep otm .. wings.. selling teenies means your short tail risk.. your short convexity at the highest level.. a teenie would be an option that is expiring three months from now on apple that is selling for .20 cents ..
like what was said before.. its all relative.. if you make the assumption that vol is mean reverting then you have to speculate what the mean is... if you believe options are priced relatively right most of the time you can use the far back month implied s as your mean and quote yourself high or low on that premium.. of course being long the vol.. i would keep the investment size down.. there is no obligation to delta hedge.. there is a cost to isolate vol so consider it.. sometimes its just better to play the options against each other.. typically dynamic delta hedging delta one is not a market makers first choice.. thats what i believe to be true.. if your making makets in options your edge is in options.. so if you can trade solely in them your better off.. thats my understanding.. you can offset your delta position in a cheaper option (relative pricing) .. if you think the vol will run up that much.. and you have a view on skew as well.. you can ratio for the expression your looking for... i'd love to hear others imput.. thats why i'm probably writing so much
the strike space is really really wide on a stock like siri... imagine apple trading at 316 bucks.. and the strikes being at 300 and 350... you have very limited strikes to pick from.. i imagine you could derive your desired exposure through ratios and laying across the term structure.. but if your view doesn't include term structure idk.. hard to believe any options trade doesn't include some inferred term structure assumption..
Quote from cdcaveman:
teenies are not called teenies because of there nominal price... just because its .20 cents doesn't mean its a teenie.. typically to me that means deep otm .. wings.. selling teenies means your short tail risk.. your short convexity at the highest level.. a teenie would be an option that is expiring three months from now on apple that is selling for .20 cents ..
like what was said before.. its all relative.. if you make the assumption that vol is mean reverting then you have to speculate what the mean is... if you believe options are priced relatively right most of the time you can use the far back month implied s as your mean and quote yourself high or low on that premium.. of course being long the vol.. i would keep the investment size down.. there is no obligation to delta hedge.. there is a cost to isolate vol so consider it.. sometimes its just better to play the options against each other.. typically dynamic delta hedging delta one is not a market makers first choice.. thats what i believe to be true.. if your making makets in options your edge is in options.. so if you can trade solely in them your better off.. thats my understanding.. you can offset your delta position in a cheaper option (relative pricing) .. if you think the vol will run up that much.. and you have a view on skew as well.. you can ratio for the expression your looking for... i'd love to hear others imput.. thats why i'm probably writing so much
agree, unless you have some edge in the underlyng, like a person at your desk makes the market in futures and gives you at the bid and takes you at the offer
I guess you assume that spot and time are unchanged
This is because option value is not linear to volatility (check the B-S formula on Excel for example). For very small changes of vol you can approximate to have linearity and constant vega but for bigger moves of IV this is not correct anymore. And that's in the simple case of constant IV in the Black-Scholes world.
I'm pretty sure 'teenie' is derived from the smallest bid/ask increment that was in place before stock market decimalization, i.e. one-sixteenth of a dollar or 6.25 cents.
In current options jargon, it sounds like a teenie is defined as a far OTM option, but how far? A Delta of 20 (.20) or less? A Delta of 10 (.10) or less? Whatever you want it to be as long as it's small?
In current options jargon, it sounds like a teenie is defined as a far OTM option, but how far? A Delta of 20 (.20) or less? A Delta of 10 (.10) or less? Whatever you want it to be as long as it's small?