delta math - NDX & QQQQ

A

adamchubb

i've got a question on calculating delta with NDX & QQQQ options....

for example, if i have a position on NDX, and then i want to adjust the delta with QQQQ option.

Based on Mar 2 close,

NDX @1846.4
QQQQ @45.41

QQQQ Mar 46 call was trading at $0.36, with delta of 0.37

If I buy one QQQQ Mar 46 call, the delta (relative to NDX) should be,
0.37 x ( 45.41 / 1846.4 ) = 0.0091

and other greeks can also be calculated in the same way.

Is that correct??? Hope you guys get what I want to say....
 
QQQQ is roughly 1/40th the size of the NDX so you need 40 QQQQ options for every 1 NDX option. This also applies to the greeks.
 
I would agree, except you are missing one thing. The multiplier.

It just happens that the multipliers happen to be a 100 on both.

Though I would be careful about calculating the other greeks this way since what you are doing is trying to equate absolute value. From the top of my head I would say it would be ok, but since I don't know your situation I would say think twice and try it out before making an end decision.

Christian

Quote from adamchubb:

i've got a question on calculating delta with NDX & QQQQ options....

for example, if i have a position on NDX, and then i want to adjust the delta with QQQQ option.

Based on Mar 2 close,

NDX @1846.4
QQQQ @45.41

QQQQ Mar 46 call was trading at $0.36, with delta of 0.37

If I buy one QQQQ Mar 46 call, the delta (relative to NDX) should be,
0.37 x ( 45.41 / 1846.4 ) = 0.0091

and other greeks can also be calculated in the same way.

Is that correct??? Hope you guys get what I want to say....
More...
 
Quote from adamchubb:


NDX @1846.4
QQQQ @45.41
More...

Those are called dollar deltas - the ratio is fine. On the floor we look at dollar deltas, not pure deltas most of the time. i.e. 10k delta in a $1 stock isn't any risk, but 1k deltas in Google is a chunk of your haircut.
 
QQQQ (minus the tracking error) is aprox. 1/40th the value of the NDX.

Thus trading them against one another - you need to use the multiplier (and tracking error) to adjust accordingly.

Remember some important properties of delta.

1. They are greatly affected by Volatility. Increase vol and you push delta towards 50, decrease volatility and you push it towards 100 or 0.

2. While it IS the rate of change of the option, if the underlying is moving up or down the volatilty skew curve - it is possible the delta doesn't change or over compensates. This is measured in the acceleration of gamma and the volatility effect.

3. Delta also has a time accelleration commponent moving it towards 100 or 0.


I always remind people be VERY careful trading deltas or delta-neutral.

Remember your delta value is only as accurate as your volatility assumptions. The current implied volatility is NOT correct, it is just the current value. You need to make your own assumptions if you think the volatility is over or under valued.

Once you determine volatility - all your other Greeks will fall in line.

You should always be operating from 3 volatility values.

1. Statistical
2. Implied
3. YOUR VALUE


I suggest using iVolatility to get your Statistical and Implied values. They have a robust data base and are an excellent resource. From there you should be able to derive your OWN volatility values.

Remember the saying - garbage in - garbage out.

I find it amusing when people just plug-n-chug current implieds to spit out theoretical values, which is just solving for the current market price (when it is staring them in the face). Why bother?
 
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