Delta Neutral strategies not for retail trader?

P

panlee

I attended an option course preview. The presenter is against using any delta neutral strategies as she said:

* it is not suitable for retail trader but rather those trader that is taking our trades (does she means market maker?)

* it costs alot in terms of commission as you have to adjust your position regularly.

She did not go into details. Any comments?
 
Its one of the options course for beginner held in Singapore. It is 'booming' business in Singapore for option trading course that introduce beginner to US option market. Just a count there are at least 5 companies doing it. Most of these courses are 3 to 5 days course and cover the option basic, strategies in which the trainer think its best and teach you how to sign up for a US account (mostly optionexpress/thinkswim) and most include live trading. Sorry can not remember the name of company.

Can elaborate why narrow mindset?
 
I'm curious as towhat strategies they advised you to engage in? There are a bunch of delta neutral positions that can be put on as a retail trader. Just because it starts out delta neutral doesn't mean it stays that way.

For instance, a 1x2(or a similar ratio) is often delta neutral, yet can easily be put on by the retail trader. A time spread will often be very close to delta neutral. Or how about a long gamma/backspread position!
 
Hello Folks:

While I don't want to oversimplify, I generally agree that delta neutral strategies can be expensive for retail traders. Just depends on how often you have to adjust deltas. I assume that a person of common intelligence will figure it out (if you can't see this right away, you really shouldn't be trading options).

On the other hand, if you want to put on delta neutral strategies, one way of minimizing your costs is to increase the size of the initial position. For spreads, a general rule of thumb is to start with a 5 or 10 lot opening position. Depending on your broker's commission schedule, this will often minimize your initial and maintenance costs on a unit basis. Also makes it possible to scale out of your position, keeping a small piece in play in case you happen to hit a homerun.

So much of successful options trading is attributable to experience and skill level that you really can't make a blanket statement without knowing all the details. In this environment it makes sense to compare the anticipated costs of trading options with the alternative of trading the underlying (buying or selling shares).

Good luck,
Steve
 
Quote from panlee:

Its one of the options course for beginner held in Singapore. It is 'booming' business in Singapore for option trading course that introduce beginner to US option market. Just a count there are at least 5 companies doing it. Most of these courses are 3 to 5 days course and cover the option basic, strategies in which the trainer think its best and teach you how to sign up for a US account (mostly optionexpress/thinkswim) and most include live trading. Sorry can not remember the name of company.

Can elaborate why narrow mindset?
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Panlee;
yes she is talking about market makers.

And several things come to mind that may be better,
depending on trader personality , than delta neutral strategies.

Also its still a good risk-reward ratio to pay FDX [Federal Express international shipping , or whatever ]
for most of these stock- option books;
Len Yates,Bernie Schaeffer,Sheldon Naternberg,
William O'Neil,Price Headly.See books top of this green page.

Could call it or put it simple a ''narrow mindset'';
or could call it focused , like a laser beam.

Wisdom is the principal thing.
 
Quote from steve46:



On the other hand, if you want to put on delta neutral strategies, one way of minimizing your costs is to increase the size of the initial position.
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Yes, you need to trade larger positions, but you have also just significantly reduced one of your major risks by being delta neutral.
 
Quote from panlee:



Can elaborate why narrow mindset?
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I'd say if the goal is to set up a delta neutral it is not too expensive as it would be nearly the same as other spreads. Many DN trades are worthwhile for the retail trader.

If the goal is to keep it delta neutral it could get very expensive and if that is her point it is somewhat valid.

Read books by McMillan for a thorough understanding of fundamentals. Also, IMO, it is difficult to make money being long delta neutral.

Take care.
 
Unfortunately you are missing my point. I am sure it is because I am expressing it in a clumsy way.

Putting on a delta neutral position does not reduce your risk for long. As soon as the position moves away from delta neutral, that reduction in risk starts to dissipate. The fact that a position starts out delta neutral is not the most important thing to focus on. Knowing how to use the concept of "delta neutral" is what reduces risk. The trader needs to define (in advance) HOW OFTEN he/she will adjust delta. Finally, because the relationship between greeks is non-linear, once a position moves away from neutral, you can be in deep trouble quickly. This last point is the most important one for new traders to learn. It is also the most difficult for retail traders to grasp.

Look, I am not interested in putting on a seminar on the subject. What I wanted to mention is that "Delta Neutral" is a concept that any trader can use profitably IF they take the time to understand the ins and outs of the technique. If they do not, but decide just to put on a position assuming that they have reduced risk, well that assumption is incorrect (or will soon be incorrect). It can be a painful way to learn. I suggest any retail trader who is interested in the subject buy and read Larry McMillan's "Options as a Strategic Investment". Start on Page 742 "Delta" and proceed to page 747 "Position Delta" and you will eventually get/see what I am saying.

Trajan, I understand that you are not a beginner. I am not suggesting that you buy McMillan's book. This part of my comment is directed to new retail traders.

Good luck to the rest of you.

Steve

Prevail;

With all respect, there is no such thing as "long delta neutral". A position is either long deltas, short deltas, or delta neutral. Lets try not to confuse people.
 
Quote from steve46:



Trajan, I understand that you are not a beginner. I am not suggesting that you buy McMillan's book. This part of my comment is directed to new retail traders.

Good luck to the rest of you.

Steve
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LoL, actually I didn't interpret your comments as such. And, I could have added what you said but I was lazy. There is a ton work which goes into an analyzing and dissecting positions. I spend a couple of hours each day outside of the normal market hours dealing with this issue because I do put on outsized positions. That for the same stocks I trade over and over.

Since, I'm waiting to go drink beer I'll add something additional. Stocks have different risk profiles. That is, a stock like CSCO, which I trade, exposes your account to a different type of risk than say another small tech stock. So, I know that the company isn't going to get taken over nor will there be a complete surprise which will cause a ten standard deviation move in the stock. I might not say the same thing about IBM which can have large moves because of news. Position sizing has as much to do with the risk which we can only base on historical patterns. It's not that move can't occur in stocks like CSCO, but you put the chances at such a move happening at very small.

However, I like moves since I'm a long gamma, long vol trader. Generally, I try to be delta neutral at the start of position. It's when I'm not that I run into problems.
 
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