delta-neutral trading

Originally posted by chisel
Nugya,

If you're on the floor, delta-neutral trading is definitely a money maker if there's plenty of volume. Delta-neutral trading a thin options market can be profitable also, but there's more of an art to it. Delta-neutral trading is just getting the "edge" on an options trade and then laying off the directional risk using the underlying. The "edge" is buying below fair value (the bid) and selling above fair value (the offer).

In today's markets, I would never trade delta-neutral without a computer program that tells me the fair value of the options, and I would also require a position analysis program that tells me my skew risk, vol risk, theta, p/l on an up or down move, etc.

I think option trading off the floor can be profitable, but it's more due to correct assumptions about the future or being a good scalper around the option position e.g., than getting the edge (which can be very tough off the floor).

HTH.
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Hi Chisel,

I was always told to keep away from thinly traded options. Could you explain the idea behind it.

thanks
 
Originally posted by Trajan
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.
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Hi Trajan,

Thank you for your contribution

For the records, I am trying get Cottles book but Amazon says it is out of print, so i' ll have to wait for that.

I have done some butterflies and have July QQQ 25/26/27 calls at the moment. When i do butterflies I would like to do them for credit.(buy/sell shorts and longs at different times)

I will study your IBM example tonight.

You mentioned working for a bank. Do they ever use indexes of different markets e.g DAX versus Nasdaq or Nasdaq versus FTSE
etc to be delta-neutral or non directional ???

good luck
 
Nugya,

Trading thin options can be very profitable because you should be able to get a big edge, but you may have to hold the position to expiration. That's where the risk lies. If you need to get out of the options, you may not be able to without giving up an even bigger edge than when you entered.
 
Trading options on and off the floor for over 12 years, I have come to the conclusion that delta neutral just means your risks are at a different stock price. Usually, when stuck in long premium, we would have to play deltas to pay decay. I have found that being short the front atm and long late dated wings is the preferable position. Near term decay seems at best a break even position. When the stuff hits the fan, owning vega will pay for any st losses in gamma. Hopefully, your scalping as well as the bid/ask spreads will cover your risks. Of course, there are times to load up as well as time to flip your position. These are the trades that make the great ones great. Timing is usually of the essence.:cool:
 
You asked about delta neutral strategies. Here is one of mine.

I look at the overall delta position of my option portfolio. (I use OptionVue to do this). In short, all of my positions are converted to a "QQQ-equivalent" position. This gives me a Portfolio Delta.

If my position gets significantly delta short (which has been constantly happening in this market), I will balance it, not by buying QQQs, but rather by buying what my scans show to be "under-priced" equity calls, or by selling "over-priced" equity or index puts (often the OEX).

Has this been a successful strategy? Yes.
 
Hi Windsufer.

When you say QQQ equivalent delta do you mean getting the $ amount of your portfolio and mapping it to qqq?

Example - if you are long (as measured by delta) 100 abc and long 100 def and 100 xyz and the total $ amount of these "300" shares is $10,000 do you then equate that with being long 400 qqq since $10,000/$25-qqq last) = 400 shares of qqq?

Thanks
 
GATrader wrote:

"When you say QQQ equivalent delta do you mean getting the $ amount of your portfolio and mapping it to qqq?

Example - if you are long (as measured by delta) 100 abc and long 100 def and 100 xyz and the total $ amount of these "300" shares is $10,000 do you then equate that with being long 400 qqq since $10,000/$25-qqq last) = 400 shares of qqq?"

My reply:

The OptionVue formula takes the beta of each underlying into account. For example, a gold stock may move inversely with the QQQs. It attempts to allow for this. I have to sometimes adjust when the numbers don't look right.

What you propose should give a good approximation if the equities are similar those in the Nasdaq 100.
 
Originally posted by windsurfer
You asked about delta neutral strategies. Here is one of mine.

I look at the overall delta position of my option portfolio. (I use OptionVue to do this). In short, all of my positions are converted to a "QQQ-equivalent" position. This gives me a Portfolio Delta.

If my position gets significantly delta short (which has been constantly happening in this market), I will balance it, not by buying QQQs, but rather by buying what my scans show to be "under-priced" equity calls, or by selling "over-priced" equity or index puts (often the OEX).

Has this been a successful strategy? Yes.
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Hi windsurfer,

Thank you for sharing your strategy with us. As you are using different underlying as part of this strategy, do you have to use naked positions as well. If so aren't you taking big risk?Also how about the margin requirements???

I would also appreciate if you could give real position example you have done in the past.

thank you
 
Originally posted by nugya


Hi windsurfer,

Thank you for sharing your strategy with us. As you are using different underlying as part of this strategy, do you have to use naked positions as well. If so aren't you taking big risk?Also how about the margin requirements???

I would also appreciate if you could give real position example you have done in the past.

thank you
More...

Yes, in this strategy, I start with straddles- buying the "undervalued" and selling straddles- usually in the index most "overvalued" (usually the OEX). I have to know the Portfolio Delta to calculate how many. For example, my notes from June 17 give an example of one of these trades: I was short 8 OEX to offset long 20 JDAS plus 20 SMH plus 10 EXPE and 20 PSFT. (I exited this in stages- I'm not in any right now).

You ask about risk- the risk is that the OEX would have moved comparatively more than the others- back then it didn't. (Right now, it could be a problem). :-)
 
Originally posted by windsurfer


Yes, in this strategy, I start with straddles- buying the "undervalued" and selling straddles- usually in the index most "overvalued" (usually the OEX). I have to know the Portfolio Delta to calculate how many. For example, my notes from June 17 give an example of one of these trades: I was short 8 OEX to offset long 20 JDAS plus 20 SMH plus 10 EXPE and 20 PSFT. (I exited this in stages- I'm not in any right now).

You ask about risk- the risk is that the OEX would have moved comparatively more than the others- back then it didn't. (Right now, it could be a problem). :-)
More...

Are these CALLS, PUTS or STOCKS???
 
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