Delta neutral returns vs. margin

ChrisM · May 7, 2003

While gamma scalping itself was a subject of discussion few times already, my concern is the potential profit vs. margin.
My margin calculation in example below, selling call ATM option and buying delta # shares of underlying goes as follows:

1. Margin for uncovered portion of call (typically 30% of underlying`s value)

plus

2. Margin for long stock position (typically 50% for marginable stocks).

Adding above together gives quite high number, so it would not be easy make significant return on capital.
Is this calculation right ? Can anybody share some experience regarding this issue ?
Any opinions greatly appreciated.

ChrisM · May 10, 2003

Anyway, thx for viewing

ArchAngel · May 10, 2003

The problem is your chosen position composition.

Try comparing the minimum hedged position margin for long calls/short stock or perhaps long puts/long stock.

Trajan · May 10, 2003

try getting away from using stock to hedge. I pass up trades because sometimes the ratio you want to analyse isn't worth it. Why make a trade for a couple hundred bucks which could tie up my capital for a week or two and leave me unable to do anything else? The last thing I look to for a hedge is stock. I'll typically use an itm call as they are the most liquid.

ChrisM · May 11, 2003

Quote from ArchAngel:

The problem is your chosen position composition.

Try comparing the minimum hedged position margin for long calls/short stock or perhaps long puts/long stock.

ArchAngel,

the beauty of my example is, that it works in flat and moving sideways markets which as we know, is the most common market activity, while your ideas if I well understand, should work better in trending markets, am I right ?
But your your concepts are very interesting, thx.

ChrisM · May 12, 2003

Quote from Trajan:

try getting away from using stock to hedge. I pass up trades because sometimes the ratio you want to analyse isn't worth it. Why make a trade for a couple hundred bucks which could tie up my capital for a week or two and leave me unable to do anything else? The last thing I look to for a hedge is stock. I'll typically use an itm call as they are the most liquid.

Trajan, thx for insights.

But stocks are theta free, while ITM calls sometimes may be costly, which changes whole concept of trading non-trending market.

spreadem · May 12, 2003

quote from Trajan :

Why make a trade for a couple hundred bucks which could tie up my capital for a week or two and leave me unable to do anything else? The last thing I look to for a hedge is stock. I'll typically use an itm call as they are the most liquid.

quote from ChrisM :

But stocks are theta free, while ITM calls sometimes may be costly, which changes whole concept of trading non-trending market.

Why not hedge stock positions by selling calls/puts? You save on margin requirements; also, even in a nontrending market you could make money from premium.

ChrisM · May 12, 2003

Quote from spreadem:

Why not hedge stock positions by selling calls/puts? You save on margin requirements; also, even in a nontrending market you could make money from premium.

Agree, but then your range of profitability is relatively narrow comparing to delta neutral.

spreadem · May 12, 2003

You could lift the hedge when market conditions change from a nontrending market to one with an established trend. Along with the adjustment in market conditions you can employ the delta neutral strategy.

ChrisM · May 12, 2003

Quote from spreadem:

You could lift the hedge when market conditions change from a nontrending market to one with an established trend. Along with the adjustment in market conditions you can employ the delta neutral strategy.

And this is exactly what I am thinking of. Can you make a bug doing this ?