delta-neutral trading

nugya · Jul 12, 2002

Does any body trade delta-neutral on regular basis and what is their comments?

I have done some in the past but would like to have expert opinion . I am totally useless at guessing the direction of the market and i panic very quickly when the trade starts to go against me ,so i feel that i have no choice but trade delta-neutral

Please tell me your opinion on delta neutral or any other non directional trade you are aware of?

thanks

Maverick74 · Jul 12, 2002

Originally posted by nugya
Does any body trade delta-neutral on regular basis and what is their comments?

I have done some in the past but would like to have expert opinion . I am totally useless at guessing the direction of the market and i panic very quickly when the trade starts to go against me ,so i feel that i have no choice but trade delta-neutral

Please tell me your opinion on delta neutral or any other non directional trade you are aware of?

thanks

Nugya, have you read "Option volatility and Pricing" by Sheldon Natenburg? If you haven't, read that five times and then come back and ask about delta nuetral trading. The subject is far too complex to just post a response on this board.

Vishnu · Jul 12, 2002

Why not wait until the VIX hits either its upper bollinger band or lower bollinger band.

If it hits the upper band:
sell puts and sell calls with the same strike price and expiration date on QQQ

if it hits the lower band:
buy puts and buy calls with the same strke and expiration for QQQ.

The idea is to wait until volatility is one extreme or the other and then buy or sell it. Market neutral.

RainMaker3000 · Jul 12, 2002

Delta neutral = zero delta , by using spreads, strangles & stradddles

puts have a negative delta, while calls have postive delta
delta refers to the amount of the underlying you have to be long or short to offset the short postions in the options

for example if your short 10 puts with a delta of -.70 you'll have to be short 700 shares to be delta neutral, but delta is constantly changing thus you'll have to readjust your postion (Dyn hedging).

using a combo that gets your portfolio to zero delta

short put with delta of -.70
short calls with a delta of .3 & .4

i think this is delta neutral trading....

if anyone can add to this...

vulture · Jul 13, 2002

Originally posted by Vishnu
Why not wait until the VIX hits either its upper bollinger band or lower bollinger band.

If it hits the upper band:
sell puts and sell calls with the same strike price and expiration date on QQQ

if it hits the lower band:
buy puts and buy calls with the same strke and expiration for QQQ.

The idea is to wait until volatility is one extreme or the other and then buy or sell it. Market neutral.

In the above example I would rather have the "naked" strangle or straddle "capped" or "anchored" because no one knows how high the VIX can go...You also would have to have an exorbitant amount of margin to be naked index options ATM or slightly OTM(split strike)...Perhaps you could do a credit spread or something similar that gives you similar "naked" exposure but anchored against a further OTM strike...The long straddle is fine...

rs7 · Jul 13, 2002

Originally posted by vulture

In the above example I would rather have the "naked" strangle or straddle "capped" or "anchored" because no one knows how high the VIX can go...You also would have to have an exorbitant amount of margin to be naked index options ATM or slightly OTM(split strike)...Perhaps you could do a credit spread or something similar that gives you similar "naked" exposure but anchored against a further OTM strike...The long straddle is fine...

I agree with this completely. Unless you are a market maker, even if you had the margin money to carry the naked positions, tying up that money (cost of carry) added to commisions, added to risk make these positions impractical.
So even though this can be a high probability trade, the ROI is way too low overall. You can't win 'em all! And your losers WILL be bigger than your winners.

Bob111 · Jul 13, 2002

i'm not a expert, but if you want to trade 0 delta, you will deal with implied volatility-thing, much more complicated than you may think.)))))))) i would suggest to you to do some paper trades, before you put your money at risk. by doing this, you will (maybe) create some kind of strategy, which may help you in future. if you buy call+ put (=0 delta) in hope, that stock price will move +\- 10+% in short period of time, you may be surprized, how quick you will loose your money, if you overpay for this combination(only because IV is too high) it only one simple example. i spend more than a year, in search kind of suitable system-results far from excellent))))). if you have time, you may visit my site at http://www.angelfire.com/de3/options/OptionCorner.html

to get the idea, what i been try to work on. maybe it will help you somehow.
Good luck!

chisel · Jul 13, 2002

I traded delta-neutral on the floor for 13 years. I wouldn't recommend it unless you can buy the option bid or sell the offer. Delta neutral traders make their money on the spread between the bid and offer, and it's nearly impossible to do it off the floor.

The only thing close to delta neutral trading I do now is to buy vol when I think it's cheap and trade stock or futures around the options, i.e., scalp the gamma.

If you put on more than a few options, you need to know how the skews work and a host of other things.

The best option book I ever read was Charles Cottle's "Options: Perception and Deception." If you understand everything in the book, you're way ahead of most option traders.

Good luck.

nugya · Jul 13, 2002

Originally posted by Maverick74

Nugya, have you read "Option volatility and Pricing" by Sheldon Natenburg? If you haven't, read that five times and then come back and ask about delta neutral trading. The subject is far too complex to just post a response on this board.

I haven't read that particular one. I was told that it goes into explaining how to calculate this and that which these days can be done with free softwares.

So what is your answer to my original question: Can you generate steady small income by delta-neutral trading??

thanks

nugya · Jul 13, 2002

Originally posted by Vishnu
Why not wait until the VIX hits either its upper bollinger band or lower bollinger band.

If it hits the upper band:
sell puts and sell calls with the same strike price and expiration date on QQQ

if it hits the lower band:
buy puts and buy calls with the same strke and expiration for QQQ.

The idea is to wait until volatility is one extreme or the other and then buy or sell it. Market neutral.

Vishue,

You are hoping with above suggestions that bollingers bands are the limits market can go furthest.

in fact you are taking a view of where the market may move next.
and you are doing this with naked positions!!!!

that is definitely not a delta neutral position.

Life is too short to worry about a naked positions!!!