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Delta hedging options wiht Futures..some text
- Thread starter cdcaveman
- Start date
this is the bottomline why i want to consider it... to avoid jump risk and margin calls.. .
Tick Size: $.01 X 100 shares = $1.00
Trading Hours: 8:15am to 3pm CST (on business days)
Last Trading Day: Third Friday of the expiration month
Margin Requirement: Generally 20% of the cash value of the stock.
Read more: http://www.investopedia.com/articles/optioninvestor/06/SingleStockFutures.asp#ixzz25QN2LUlq
daytrading margin is .25 meaning 25 grand gets you 100 grand.. but at the end of the day you end up back at .50 so you can only really trade the underlying as if you have only 50 percent margin because you have to figure anyone selling options is holding over night! so therefore only putting .20 up on margin and the requirment not changing for overnight holds gives you more room to trade! meaning you can either say proportionally more premium because of your increase ability to hedgin in the underlying due to the increased leverage... or you have a higher net buffer to hedge with if needed.. that means i could trade a little more premium then i could with just REG-T .50 margin but know that i have plenty of powder left to hedge with..
this follows my theory of trade... buy time as cheaply as you can... leave as much room for error direction as you possibly can... so you can make off with your directional/ volatility/ and time assumptions enough that you still make money... if you believe you are fallible that is. if you don't GOOD LUCK haha
Tick Size: $.01 X 100 shares = $1.00
Trading Hours: 8:15am to 3pm CST (on business days)
Last Trading Day: Third Friday of the expiration month
Margin Requirement: Generally 20% of the cash value of the stock.
Read more: http://www.investopedia.com/articles/optioninvestor/06/SingleStockFutures.asp#ixzz25QN2LUlq
daytrading margin is .25 meaning 25 grand gets you 100 grand.. but at the end of the day you end up back at .50 so you can only really trade the underlying as if you have only 50 percent margin because you have to figure anyone selling options is holding over night! so therefore only putting .20 up on margin and the requirment not changing for overnight holds gives you more room to trade! meaning you can either say proportionally more premium because of your increase ability to hedgin in the underlying due to the increased leverage... or you have a higher net buffer to hedge with if needed.. that means i could trade a little more premium then i could with just REG-T .50 margin but know that i have plenty of powder left to hedge with..
this follows my theory of trade... buy time as cheaply as you can... leave as much room for error direction as you possibly can... so you can make off with your directional/ volatility/ and time assumptions enough that you still make money... if you believe you are fallible that is. if you don't GOOD LUCK haha
Quote from dmo:
CDcaveman, maybe the lack of response is because it's unclear what the question is. Hedging options on futures with the underlying futures is pretty straightforward. What is it you'd like to know?
instead of using the underlying stock to get your deltas i'm talking about using futures to get your deltas to neutralize selling premium.. or the reverse gamma scalping.. either way.. just depends on your volatility forecast.. so futures as a stock replacement to either hedge short premium or gamma scalp long premium.. clear ?
Long story short, your delta hedging has to have 'edge' in and of itself. Using it to hedge your short premium is a mission because there are two things to consider: hedge frequency (daily, at certain price points, etc.) and size of hedge.
On frequency: Too low frequency, you'll always be behind the curve when the big moves happen (bull or bear, believe me). Too high frequency, you'll need to make it automated and commissions/slippage become a factor (at retail level).
On size: Large size hedges will dramatically change the look of your position, to the point it's becoming a lot more directional than you think. Small hedges, just like low frequency, you'll be behind the curve on the big move.
Granted, these are all issues that you would find for a retail/manual trader. IMO, its something left for the pros.
FWIW, in my experience, there is the middle ground between too low/too high frequency and small/large hedges that is attainable, but it must be automated. If you are a programmer, have at it. Otherwise, trying to do it manually....you will die. From stress/no life.
On frequency: Too low frequency, you'll always be behind the curve when the big moves happen (bull or bear, believe me). Too high frequency, you'll need to make it automated and commissions/slippage become a factor (at retail level).
On size: Large size hedges will dramatically change the look of your position, to the point it's becoming a lot more directional than you think. Small hedges, just like low frequency, you'll be behind the curve on the big move.
Granted, these are all issues that you would find for a retail/manual trader. IMO, its something left for the pros.
FWIW, in my experience, there is the middle ground between too low/too high frequency and small/large hedges that is attainable, but it must be automated. If you are a programmer, have at it. Otherwise, trying to do it manually....you will die. From stress/no life.
Quote from swag:
Long story short, your delta hedging has to have 'edge' in and of itself. Using it to hedge your short premium is a mission because there are two things to consider: hedge frequency (daily, at certain price points, etc.) and size of hedge.
On frequency: Too low frequency, you'll always be behind the curve when the big moves happen (bull or bear, believe me). Too high frequency, you'll need to make it automated and commissions/slippage become a factor (at retail level).
On size: Large size hedges will dramatically change the look of your position, to the point it's becoming a lot more directional than you think. Small hedges, just like low frequency, you'll be behind the curve on the big move.
Granted, these are all issues that you would find for a retail/manual trader. IMO, its something left for the pros.
FWIW, in my experience, there is the middle ground between too low/too high frequency and small/large hedges that is attainable, but it must be automated. If you are a programmer, have at it. Otherwise, trying to do it manually....you will die. From stress/no life.
that would be a ground up development to put together a piece of software like that...
i've thought about this before... say you take ninjatrader.. basically the thought is through the Interactive broker API. Auto trade based upon time,hedge size and price action(gamma changes).. whatever combination makes sense considering commissions.. but there is no way to feed your script in ninjatrader the changing volatility/gamma assumptions realtime in the trade.. if I did have a way to access it.. it wouldn't be hard at all to program indicators based on the changing assumptions and program the logic to trade thereof.. i think Sierra charts has like a worksheet feature.. but i don't know if you could map in option assumptions and create an indicator to trade from..
Quote from swag:
Long story short, your delta hedging has to have 'edge' in and of itself. Using it to hedge your short premium is a mission because there are two things to consider: hedge frequency (daily, at certain price points, etc.) and size of hedge.
On frequency: Too low frequency, you'll always be behind the curve when the big moves happen (bull or bear, believe me). Too high frequency, you'll need to make it automated and commissions/slippage become a factor (at retail level).
On size: Large size hedges will dramatically change the look of your position, to the point it's becoming a lot more directional than you think. Small hedges, just like low frequency, you'll be behind the curve on the big move.
Granted, these are all issues that you would find for a retail/manual trader. IMO, its something left for the pros.
FWIW, in my experience, there is the middle ground between too low/too high frequency and small/large hedges that is attainable, but it must be automated. If you are a programmer, have at it. Otherwise, trying to do it manually....you will die. From stress/no life.
i've read somewhere.. where this was equated/quantified ... meaning hedge size, and frequency could be obtained with some equation and imputing some number of assumptions.. IE realized volatility.. your forcast.. and it would be a good idea to consider jumps.. i imagine.. either way.. this gets to be way out of my league.. at least for now... some kind of buy/overwrite strategy with buy stops with your hedging element (IE future/underlying/other options) and or stop loss on the whole strategy seems a little less complex and more rewarding..
Quote from cdcaveman:
YOU BLEED WHEN YOUR SHORT PREMIUM.. your scalping when your long volatility/long premium
So you want to buy ATM (synth straddles) and hedge discretely?
OK, I have a close friend who makes markets in CL. He went huge in the ATM straddles (synthetics) and went bust. All it takes is to miss a couple of hedges and get pinned. He could've save a mil simply by getting out a day before expiration, but was high on hopium. Imagine telling your kid he's got to leave Exeter because of one bad trade in CL.
The moral is that you can (effectively) go bust in long gamma as well.
You buy a vol-figure and hit all your hedges... even assuming this you've got to see realized vol exceed your bought figure to account for edge loss/slip on the hedge. It's really not a money maker for the upstairs guy. It's useful to scalp with a one lot to get the mechanics down, but not something I want to generate a lot of PNL.
At you're funding it's essentially a waste of time. Look at the haircut on trading a 2-lot ATM in XOM for example. Carrying the one lot synthetic straddle on day 1 is probably $2k in req and you're burning $30 in theta.
Quote from atticus:
So you want to buy ATM (synth straddles) and hedge discretely?
OK, I have a close friend who makes markets in CL. He went huge in the ATM straddles (synthetics) and went bust. All it takes is to miss a couple of hedges and get pinned. He could've save a mil simply by getting out a day before expiration, but was high on hopium. Imagine telling your kid he's got to leave Exeter because of one bad trade in CL.
The moral is that you can (effectively) go bust in long gamma as well.
You buy a vol-figure and hit all your hedges... even assuming this you've got to see realized vol exceed your bought figure to account for edge loss/slip on the hedge. It's really not a money maker for the upstairs guy. It's useful to scalp with a one lot to get the mechanics down, but not something I want to generate a lot of PNL.
At you're funding it's essentially a waste of time.
Interesting.. i guess thats why i see so many jumps monday morning after opex on strike pinned stocks..
Quote from cdcaveman:
Interesting.. i guess thats why i see so many jumps monday morning after opex on strike pinned stocks..
Send me your email to PM and I'll send some stuff tomorrow near the close. A summary of what to look for, why, when. With $5k you're essentially forced into trading a cash req; singles, verts, flies, calendars, etc.
Quote from swag:
Long story short, your delta hedging has to have 'edge' in and of itself. Using it to hedge your short premium is a mission because there are two things to consider: hedge frequency (daily, at certain price points, etc.) and size of hedge.
On frequency: Too low frequency, you'll always be behind the curve when the big moves happen (bull or bear, believe me). Too high frequency, you'll need to make it automated and commissions/slippage become a factor (at retail level).
On size: Large size hedges will dramatically change the look of your position, to the point it's becoming a lot more directional than you think. Small hedges, just like low frequency, you'll be behind the curve on the big move.
Granted, these are all issues that you would find for a retail/manual trader. IMO, its something left for the pros.
FWIW, in my experience, there is the middle ground between too low/too high frequency and small/large hedges that is attainable, but it must be automated. If you are a programmer, have at it. Otherwise, trying to do it manually....you will die. From stress/no life.
+1
Major shops will look to replicate in another name as by-product of adding liq in their operation. If I had to avoid one strategy it would be a gamma-scalp methodology. If you suspect you'll be drifting into a higher vol-line (index dropping) then it can makes some sense, but then you're better off going long vol outright.