My impression was that your question was very broad. It would have been better to ask, "what are some effective delta neutral strategies." You still would have gotten back that delta neutral is a loaded term. A stock could move 20% and your deltas could go positve to neutral to negative back to neutral. This is why people emphasis reading Cottle. He disects positions to help you understand where your risks is. When you trade delta neutral, you still take on significant risk. The other greeks become more important. That is why Maverick74 wrote what he did. You don't need to go as far as he suggest. WTF is the fourth derivative of an option? I have no idea. The minimum probably lies somewhere between Natenberg and Cottle. There are people on the floor who would stuggle with Natenberg and, yet, still make a boatload of money. They make money by buying on the bid and selling on the offer.
Have you ever looked at trading butterflys? In the era of $1 commisions, many strategies have become viable. They aren't completely delta neutral, but, can offer pretty good risk reward in a high IV environment like now. You would have to trade a liquid stock where you could leg into parts of it. Otherwise, the spreads would kill any perceived edge you get. To explain how to trade it, would take a book, like Cottle. It explains how to make a straddle into a fly. To a professional option trader, calls and puts are same thing, another thing covered. By understanding these relationships, you would be able to leg into spreads at better prices because there are more markets to scan for price discrepencies.
We discussed flys here:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=6670
I would resuggest my idea of buy a call spread and selling stock delat neutral. You could even do a ratio and sell stock. Buy 10 IBM July 70c and sell 12 75c and 300 shares of stock leaves you delta neutral for a debit of 1.40. Stock down five points, you make 100 bucks, up five points, $1300, unch, your out your 1.40. However, you would trade around it for the next week, scalping gamma.
To be really honest about it, I would do it at ratio of 2 to 1 or 2.5 to 1, f^&&, maybe 3 to 1, all within a larger position. This means, I would have a larger position and am simply adding exposure to it. I would then trade the 70 as a straddle for intraday scalping. For risk, I would leave them all in. Intraday, I wouldn't worry about them till the stock got to 72 on monday or tuesday, 74 for the rest of the week. As the stock approaches 75, I would aggressively buy that line in. Then repeat the process around the 75/80 call spread. Why does this work when you seemingly have a lot of naked exposure? IV is at 50. If the stock rallies, this will drop, plus, the options are rapidly decaying with only a few days remaining. On Thursday, with stock at 74, what would the 75 calls be worth? .50, .60 or .70. Your big risk is the gamma explosion around 73. It can be managed. Could the stock gap up 10%? Sure, lets look at what the P/L would be at 77(3:1), +1000, at 80, -5000m, it gets worse from there. IBM has a recent history of making significant gaps, so, the risk is real, escpecially with an earnings release this week. The earnings release actually changes some of the stuff above. I didn't realize that until now. I would definitely cut the ratio down if the stock could gap up 10% through the 75. Still, it is within a larger position, so, you never know. I could be long a bunch of premium in the back months. For a straight position, I wouldn't go much above 2 to 1 and trade it the same way. When I traded for a bank and didn't have to worry about my haircut, this was my preferred strategy. The stock I traded was not very jumpy. It worked. Trading IBM was a different story. Because of haircut, it seemed I owned these piece of shit calls all the time.
