Delta neutral or directionality: which one do you pick?

[cdcaveman]

As i typically say.. your always exposed to direction in some respect.. and the idea behind neutral trading has been de bunked so many times... as the assumptions of hedging continuously in time without friction aren't real at all.. even in static replication IE box or jelly rolls you are exposed to changing interest rates and dividend risk..

the more someone presents "delta neutral" trading as something a world away from directional trading.. the more i think they don't know the risks associated with it.. your bleeding or scalping gamma when you hedge options.. your speculating on hedge frequency and size... you can slow play the size and frequency of your hedges to stay more short gamma as you feel it is over priced or you can front run it because the underlying is so clearly moving against your options positions therefore you can more then offset your losses in the short options.. so how the hell are you not directional when your dynamically delta hedging..

 

[riskaddict]

Quote from 1245:

I did not know the answer either, so I asked him directly. He is referring to option spreads that are designed to bet where the underlying will be at expiration. An example would be a stock trading at 43 and I think in 2 months, the stock will be around 50. I could buy the 45/50 1x2 call spread betting where the stock will terminate. I did these all the time but never placed a name on the strategy.

Ahh I just call it the sweet spot. I haven't bought an option all year but I sell what I consider directional strangles. Take right now in oil for instance. We are in this wonderful wedge with a top currently around 94.50 and a bottom around 88. I sell the 94 and 95 calls and sell the 88 and 89 puts and just collect the theta every few day or just adjust my delta to suit a shorter time frame pattern. when the shit hits the fan and the breakout happens I just buy or sell the outright in that direction and it buys me time to unwind the strangle. But ideally I'm out a couple of days before the breakout actually happens because I'm stalking the directional move.

I never really care about what the price is at expiration if you can guess that you're fucking rainman. I generally move on to the next month when there are 4 or 5 days left on the front month because the gamma makes it to risky.

 

[cdcaveman]

Quote from riskaddict:

Ahh I just call it the sweet spot. I haven't bought an option all year but I sell what I consider directional strangles. Take right now in oil for instance. We are in this wonderful wedge with a top currently around 94.50 and a bottom around 88. I sell the 94 and 95 calls and sell the 88 and 89 puts and just collect the theta every few day or just adjust my delta to suit a shorter time frame pattern. when the shit hits the fan and the breakout happens I just buy or sell the outright in that direction and it buys me time to unwind the strangle. But ideally I'm out a couple of days before the breakout actually happens because I'm stalking the directional move.

I never really care about what the price is at expiration if you can guess that you're fucking rainman. I generally move on to the next month when there are 4 or 5 days left on the front month because the gamma makes it to risky.

How do you diffuse jumps.....tail risk

 

[taowave]

I see..

Still a delta bet at some point.

Quote from 1245:

I did not know the answer either, so I asked him directly. He is referring to option spreads that are designed to bet where the underlying will be at expiration. An example would be a stock trading at 43 and I think in 2 months, the stock will be around 50. I could buy the 45/50 1x2 call spread betting where the stock will terminate. I did these all the time but never placed a name on the strategy.

 

[taowave]

They are vastly different, assuming one takes a predefined systematic approach to hedging.


[QUOTED]Quote from cdcaveman:

As i typically say.. your always exposed to direction in some respect.. and the idea behind neutral trading has been de bunked so many times... as the assumptions of hedging continuously in time without friction aren't real at all.. even in static replication IE box or jelly rolls you are exposed to changing interest rates and dividend risk..

the more someone presents "delta neutral" trading as something a world away from directional trading.. the more i think they don't know the risks associated with it.. your bleeding or scalping gamma when you hedge options.. your speculating on hedge frequency and size... you can slow play the size and frequency of your hedges to stay more short gamma as you feel it is over priced or you can front run it because the underlying is so clearly moving against your options positions therefore you can more then offset your losses in the short options.. so how the hell are you not directional when your dynamically delta hedging.. [/QUOTE]

 

[1245]

Quote from taowave:

I see..

Still a delta bet at some point.

It is often a combination of a delta bet and a bet on volatility. Here is an example. AAPL closed at 527. If I think AAPL will rise from now to Jan expiration but not fire up, I could:

B/10 AAPL Jan 530 calls 10.90, 47 delta
S/20 AAPL Jan 550 calls 4.20, 24 delta
Net 2.50

I will never wait until expiration day to take this off, but I would most likely wait until mid expiration week. Given that, I'll likely make money with the stock if it stays the same or goes up, but not to quickly. I attached this example.

 

[taowave]

Hi 1245,
I know exactly what you refer to.A long time ago,I was the head trader of emerging market equity derivatives at Salomon Smith Barney,and am somewhat familiar with ratio spreads

I trade similar spreads to you,but never assume the stock couldn't "fire up" when I least suspect it.If I am bullish,I never want to lose money because I am dead right.

This is a good thread

T

Quote from 1245:

It is often a combination of a delta bet and a bet on volatility. Here is an example. AAPL closed at 527. If I think AAPL will rise from now to Jan expiration but not fire up, I could:

B/10 AAPL Jan 530 calls 10.90, 47 delta
S/20 AAPL Jan 550 calls 4.20, 24 delta
Net 2.50

I will never wait until expiration day to take this off, but I would most likely wait until mid expiration week. Given that, I'll likely make money with the stock if it stays the same or goes up, but not to quickly. I attached this example.

 

[taowave]

PM,what you do is 100% directional.

My best guess is you are trading a size that that cant do too much damage to your financial health.Assuming a stock wont drop below your short strike and not adjusting till then is fine and dandy on a small portfolio,but if you levered up,you would be singing a slightly different tune

Quote from Put_Master:

I suppose what I do (selling otm puts), would be classified as trading direction.
But I prefer to think of it as "trading ranges".... without the "restrictions and/or potential consequences", of trading a strangle, straddle, or spread,.... if those ranges are breached.

Yes, I certainly benefit if the stock rises, as a rise increases my "probability" of success, and/or shortens the trade as I can close the stock earlier for a profit.
Yes, my downside risk is not predetermined.

But I don't enter a trade assuming the stock will rise.
I enter assuming the stock will not drop below a certain price.
Only if it does, do I then become a directional trader.

Until that occurs, I consider myself an open ended and unrestricted "range trader".... primarily taking advantage of theta.
And to a lesser degree, "IV and direction", if/when those occurs.
But they are not my primary objectives. I merely take advantage of them if/when they work to my benefit.

 

[1245]

Quote from taowave:

Hi 1245,
I know exactly what you refer to.A long time ago,I was the head trader of emerging market equity derivatives at Salomon Smith Barney,and am somewhat familiar with ratio spreads

I trade similar spreads to you,but never assume the stock couldn't "fire up" when I least suspect it.If I am bullish,I never want to lose money because I am dead right.

This is a good thread

T

The point is to match the spread and ratio to our expectation. If your more bullish, sell an option more OTM or on a different ratio. We can't be right all the time and are trying to put the odds more in our favor.

1245

 

[Put_Master]

Quote from taowave:

PM,what you do is 100% directional.

My best guess is you are trading a size that that cant do too much damage to your financial health.Assuming a stock wont drop below your short strike and not adjusting till then is fine and dandy on a small portfolio,but if you levered up,you would be singing a slightly different tune

While I assume (hope) the stock won't drop below my strike, I don't feel restrained, restricted, or limited to that strike.
Unlike a leveraged spread trader, I can allow the stock to trade up to 20% below my strike, and not think twice about it.
While I'm usually leveraged, its to a reasonable degree.
And I'm "diversified" enough, that if 75 - 80% of my stocks get put to me, with the remaining 20 - 25% expiring, I won't even be on margin.

I have no problem owning my stocks at my strikes, selling covered calls, and collecting dividends..... until they recover or become neutralized.
But then again, I'm picky about the stocks and strikes I select.
Thus, while I'm classified as a directional trader, I feel more like a "range trader", with a very wide 2 sided range to work in.... with one side being unlimited, and the other range being about 20% below my strike.

On the other hand, if a put selling trader like me is not as diversified, and is using excessive leverage, and has double my % return goals, and is not as picky about their stock and strike selection,........ then ignore everything I stated above.