Delta Neutral Organization

[Andy_Trade]

Hello,

I'm new to this forum and have read quite a bit of it, but I do have some questions, if I may ask, for some traders with experience in delta neutral trading.

The concept of delta neutral trading drew me in immediately. But it seems there are a few main drawbacks that people cite:

1) High cost of fees.

2) You do have to have some capital to work with.

3) Most people don't have 6 hours to sit in front of a computer screen watching the market, so they wouldn't be able to adjust their position if a big move in the stock throws the delta way off.

Luckily, I have time, capital to work with, and I can always sign up with a reputable discount broker. But are there any other major drawbacks that I should be concerned about?

I have started a few mock trades, I've made some mistakes big and small, and am trying to correct them.

I think one of the main problems I'm having is organization. Please, any advice or methods of organizing all the information I'm looking at, or any written in stone organizational process that is needed for delta neutral trading would be greatly appreciated.

Also, where can I see a thorough explanation of how to calculate realized/unrealized profits during the trade, at the end of the trade, whatever.

And what do most consider the best way to delta neutral trade? With options of both sides, stock on one side options on the other, or options on both sides and then using the stock to make your adjustments?

What do people like to do the best: buy positions such as straddles with a long time until expiration in high volatile big moving stocks? or sell strangles etc. with only a few weeks until expiration on low volatility stocks?

All answers are greatly appreciated.

-Andy

 

[Eliot Hosewater]

I was going to start a thread about alternatives to delta neutral, but maybe this one will do.

I am beginning to think delta positive/gamma negative might be a better solution, at least as far as adjustments go. it's self adjusting to a certain degree. If your stock goes up you start losing deltas, and if it goes down you gain deltas.

Also, I find the ThinkorSwim monitor screen is handy for seeing your greeks for individual options and total positions. You can even highlight several individual ones and get a total - like showing just your short term positions on a double calendar, etc. (However I don't see how overall totals is meaningful.)

 

[spindr0]

I have limited experience with delta neutral trading (long straddles as well as ratioed calls against stock). I've worked a few positions and the results have been OK. The biggest problem that I've had is keeping track of all of the details (what you describe as organizing all the information). Sometimes, I look at yesterdays notes and wonder who got hold of my trading notebook

I've been working on a spreadsheet that does it all and is easy to read and use. Writing the spreadsheet is no problem. That's just formulas. What I'm struggling with is the layout/design of it all so that a quick glance provides all of the info needed to know where I stand at any moment in time once I input current prices and delta(s). So my question is, anyone know of a web site/source that might already have invented this kind of wheel?

As for your questions:

1) You need to be trading at a broker where it's a flat fee per share. A minimum commission per trade will kill ya.

2) Capital is capital. You have it or you don't trade

3) If you don't have the time to sit in front of your computer (or at least nearby) and monitor a position that needs monitoring, you shouldn't be in that kind of position. Set your price alerts and let the broker do the heavy lifting.

As I see it, the biggest drawbacks are time decay and IV contraction. You need an underlying that moves and hopefully, retracements.

Do a web search on gamma risk, gamma scalping, delta neutral, etc. and you'll find a lot of informative info.

It's a learning experience and I'm trading small until I feel comfortable enough to add this to my other strategies in use.

 

[Andy_Trade]

Thanks Guys,

"I've been working on a spreadsheet that does it all and is easy to read and use. Writing the spreadsheet is no problem. That's just formulas. What I'm struggling with is the layout/design of it all so that a quick glance provides all of the info needed to know where I stand at any moment in time once I input current prices and delta(s). So my question is, anyone know of a web site/source that might already have invented this kind of wheel?"

How does the spreadsheet work? Even if you can't see everything on one page, is it something you do use?


"As I see it, the biggest drawbacks are time decay and IV contraction. You need an underlying that moves and hopefully, retracements."


This would be if you were delta neutral trading a long position, correct? I've been doing mock trades using a short strangle and so far it has worked out pretty good. Even with some huge errors in adjustments on my part, I'm still in the green. Even am playing a short strangle delta neutral on GOOG and it's in the green.

I would like to learn more about delta neutral trading using long positions though, as they are more suited for a stock like goog or aapl, correct?

Has anyone ever tried or considered trying a call or put backspread delta neutral trade?


- Andy

 

[iloveoptions]

Quote from Andy_Trade:

Hello,

I'm new to this forum and have read quite a bit of it, but I do have some questions, if I may ask, for some traders with experience in delta neutral trading.

The concept of delta neutral trading drew me in immediately. But it seems there are a few main drawbacks that people cite:

1) High cost of fees.

2) You do have to have some capital to work with.

3) Most people don't have 6 hours to sit in front of a computer screen watching the market, so they wouldn't be able to adjust their position if a big move in the stock throws the delta way off.

Luckily, I have time, capital to work with, and I can always sign up with a reputable discount broker. But are there any other major drawbacks that I should be concerned about?

I have started a few mock trades, I've made some mistakes big and small, and am trying to correct them.

I think one of the main problems I'm having is organization. Please, any advice or methods of organizing all the information I'm looking at, or any written in stone organizational process that is needed for delta neutral trading would be greatly appreciated.

Also, where can I see a thorough explanation of how to calculate realized/unrealized profits during the trade, at the end of the trade, whatever.

And what do most consider the best way to delta neutral trade? With options of both sides, stock on one side options on the other, or options on both sides and then using the stock to make your adjustments?

What do people like to do the best: buy positions such as straddles with a long time until expiration in high volatile big moving stocks? or sell strangles etc. with only a few weeks until expiration on low volatility stocks?

All answers are greatly appreciated.

-Andy

Hi,

You're asking the right questions and I will try to answer them the best I can based on my personal experience . I trade delta (slightly) neutral all the time, and I am quite successful at it. However, it's quite demanding and does require you to baby sit your position(s). If your stocks like to dance around with vigor and form, then you must be quick on the trigger, thus the need to be near the computer at all times is critical, but not necessarily watching it, as attention-grabbing alerts will suffice. The most effective way I found to trade this strategy and neuter my positions (to a certain degree) is by using options with options. Do your best to avoid a volatility contraction at all cost as that will hurt your performance. While it's tempting to sell options to neuter your positions, I advise you against it as it will limit the trade's ultimate potential because one large move (which happens frequently in my trading) will make your day, week, and month, and in that situation, you certainly want to be 100% long gamma.

While a big drawback in trading DT is time decay, it can still be beat hands down, if and only if you have developed a highly effective model that positions you in stocks that will move large enough to make at least 4X the theta your position(s) will experience, in addition to the Bid/ask spread you have to pay on the way out. Even though this step entails more work, I highly advise you to be diversified in more that one stock (3 or more is optimum) at all times just in case one stock misbehaves. Just like anything else in life, there’s a learning curve and time that needs to be put in to make this strategy pay off consistently as you’re constantly having to solve for future volatility in form as well as duration and that’s quite a difficult task to accomplish on a consistent basis. There’s much more of course to successfully trading DT strategies , but creativity, timing, and sizing techniques all come to mind in addition to what I have discussed here. Best of luck in your trading.

 

[Andy_Trade]

Quote from iloveoptions:

Hi,

If your stocks like to dance around with vigor and form, then you must be quick on the trigger, thus the need to be near the computer at all times is critical, but not necessarily watching it, as attention-grabbing alerts will suffice.

This isn't really a problem since I don't have a 9 - 5 type job and a lot of times I'm working in afternoons, and here in California the market closes at 1:00, but I am interested in the alerts you mention. How or where or what exactly is that and how do you use it?

Quote from iloveoptions:
The most effective way I found to trade this strategy and neuter my positions (to a certain degree) is by using options with options. Do your best to avoid a volatility contraction at all cost as that will hurt your performance. While it's tempting to sell options to neuter your positions, I advise you against it as it will limit the trade's ultimate potential because one large move (which happens frequently in my trading) will make your day, week, and month, and in that situation, you certainly want to be 100% long gamma.
[/B]

Volatility contraction will only really hurt me in a DT trade if I'm in some type of long strategy such as a long straddle correct? I'm looking for volatility to be low in a short strangle situation, right?

As for the selling of options to adjust the delta, sorry but could you explain more of how it could limit the trade, and is this thinking coming from a long straddle or other long angle?

Thanks again everyone.

-Andy

 

[spindr0]

How does the spreadsheet work? Even if you can't see everything on one page, is it something you do use?

The idea is to see everything that you need to see on one page. Enter the prices and deltas and get back the net delta (including stk buys and sells), realized and unrealized P&L of the option stk and option positions, etc.

"As I see it, the biggest drawbacks are time decay and IV contraction. You need an underlying that moves and hopefully, retracements." This would be if you were delta neutral trading a long position, correct?

Any option is susceptible to IV change.

I would like to learn more about delta neutral trading using long positions though, as they are more suited for a stock like goog or aapl, correct?

. At my level, I'd say that anything that moves around and is liquid (reasonable B/A spread) is a possibility.

 

[iloveoptions]

Quote from Andy_Trade:

This isn't really a problem since I don't have a 9 - 5 type job and a lot of times I'm working in afternoons, and here in California the market closes at 1:00, but I am interested in the alerts you mention. How or where or what exactly is that and how do you use it?



Volatility contraction will only really hurt me in a DT trade if I'm in some type of long strategy such as a long straddle correct? I'm looking for volatility to be low in a short strangle situation, right?

As for the selling of options to adjust the delta, sorry but could you explain more of how it could limit the trade, and is this thinking coming from a long straddle or other long angle?

Thanks again everyone.

-Andy

The type of alerts I was talking about are sound alerts that you hear when stocks/options you are trading reach a specified price target you set when you initiate your positions. The majority of trading software packages have this feature built into them.

Volatility contraction(both in I.V. as well as future realized volaitilty form) will hurt you if you are long gamma (Long Call or Put, long a Strangle or a Straddle). Yes, you are looking for future realized volatility to come in on the low side, and I.V. to be decent and dropping, soon after you initiate your short strangle.

If I.V. is in the medium to low range and future realized volatility ends up being much greater than the recent historical volatility the stock just experienced which is what you want to happen(because of a up/down gap or a 2+ sigma moves) when you initiate a long straddle, shorting an option at a higher strike is not the correct way to neuter the position because you'll typically get little premium for it in addition to its high gamma characteristic. However, if I.V. popped significantly when you're ready to neuter, then selling a juicy option makes a lot of sense as future realized volaitility typically tends to revert to the mean (ends up coming lower even though it might take sometime). At the end, future volatility changes determines whether you made the right decision or not.

 

[Andy_Trade]

Quote from spindr0:

Any option is susceptible to IV change.

[/B]

Yes, but if I'm understanding correctly, IV contraction would hurt a long DN trade, help a short DN trade and vice versa?

 

[Andy_Trade]

Quote from iloveoptions:



If I.V. is in the medium to low range and future realized volatility ends up being much greater than the recent historical volatility the stock just experienced which is what you want to happen(because of a up/down gap or a 2+ sigma moves) when you initiate a long straddle, shorting an option at a higher strike is not the correct way to neuter the position because you'll typically get little premium for it in addition to its high gamma characteristic. However, if I.V. popped significantly when you're ready to neuter, then selling a juicy option makes a lot of sense as future realized volaitility typically tends to revert to the mean (ends up coming lower even though it might take sometime). At the end, future volatility changes determines whether you made the right decision or not.

So what would be the correct way to neuter positions (based on the type of trade; long straddle, short strangle, market moving up a lot, a little, sideways, down a lot, down a little.)

Do you know where I can read more about the proper way to neutralize a position according to strategy used and the market conditions?

It seems everything I've read so far in the last couple months is good general information, but no specifics for all the different styles of trading...