Managing/Adjusting Positions

[nitro]

Every time I see these videos and tutorials by these people I cringe.

Your question makes no sense. Without knowing why you put the trade on, when earnings is, is there a dividend, what was the skew on position initiation and what is your expectation for the skew on up moves and down moves on the underlying, what vola do you use to delta hedge, how does the stock react to the indices on selloffs, to rallies, what are your commissions, what is the bid/ask spread on the options, do you have cancel fees...The list literally goes on.

Anyone that gives advice on an options position without knowing the answers to the above questions doesn't know what he is talking about.

 

[HumbleBobby]

I do agree with NITRO 100% and if you would like to continue doing that type of trading I would suggest that you stop trading or reduce the number of trades that you are currently managing/adjusting, and spend more time on learing how to adjust complex options strategies.

As far as the best place to go to learn that, is usually options trading schools (prepare to spend alot of money)

 

[dreamliner]

Well, since you didn't choose the "quote" option, I don't know who you're talking about here when you say "you." The "quote" is a simple thing to choose, you can see it right down there at the bottom.

But I will assume you are talking about me, so here are the answers to your "questions":

1. I put the trade on to make money.

2. The trades are on Index funds or ETFs.

3. I know nothing about "skew" whatseover.

4. I know nothing about "vola." If you are referring to volatility I'm not sure how to use volatility to hedge delta.

5. My commissions are $1.25 with no cancel fees.

6. I don't know what the bid ask is, I suppose I could look it up.

Quote from nitro:

Every time I see these videos and tutorials by these people I cringe.

Your question makes no sense. Without knowing why you put the trade on, when earnings is, is there a dividend, what was the skew on position initiation and what is your expectation for the skew on up moves and down moves on the underlying, what vola do you use to delta hedge, how does the stock react to the indices on selloffs, to rallies, what are your commissions, what is the bid/ask spread on the options, do you have cancel fees...The list literally goes on.

Anyone that gives advice on an options position without knowing the answers to the above questions doesn't know what he is talking about.

 

[jwcapital]

Trying to stay delta neutral--as a small-time trader--is futile. I have tried it, and it requires constant monitoring and trading--and you still lose money doing it. The only people that can stay delta neutral are market makers. Market makers are typically short the underlying, long the call, and short the put. Let's say 100 sh of xyz are purchased at 50. The 50 call is purchased at .75, and the 50 put is sold at 1.00. The market maker makes .25 (give or take), he pays peanuts for commissions and he does this all day every day--many times a day.

The number one factor determining option price movement is volatility (implied). If one can forecast volatility, then choosing the appropriate option strategy is easy...direction will not be as important. There are option strategies that start out close to delta neutral and do not require any adjustment other than exiting when your profit goal is reached or mental loss is reached. Choosing short-dated vs long-dated options; OTM, ATM and ITM options---this helps you create spreads that meet the conditions.

 

[sonoma]

Quote from jwcapital:

Trying to stay delta neutral--as a small-time trader--is futile. I have tried it, and it requires constant monitoring and trading--and you still lose money doing it. The only people that can stay delta neutral are market makers. Market makers are typically short the underlying, long the call, and short the put. Let's say 100 sh of xyz are purchased at 50. The 50 call is purchased at .75, and the 50 put is sold at 1.00. The market maker makes .25 (give or take), he pays peanuts for commissions and he does this all day every day--many times a day.

The number one factor determining option price movement is volatility (implied). If one can forecast volatility, then choosing the appropriate option strategy is easy...direction will not be as important. There are option strategies that start out close to delta neutral and do not require any adjustment other than exiting when your profit goal is reached or mental loss is reached. Choosing short-dated vs long-dated options; OTM, ATM and ITM options---this helps you create spreads that meet the conditions.

Try using a "band" around the BS delta instead of staying completely flat. Reduces friction substantially. Even retail traders can trade this way.

Neutral delta positioning by itself can not correct a negative replication error. It simply keeps your directional risk under control. Regardless of how counterintuitive it sounds, sometimes neutral delta trading guarantees a negative replication error.

 

[nitro]

All this advice on delta hedging is trying to be helpful, but misses the fundamental point. If you knew what regime the market is in that day, you would know the perfect hedging strategy as well. Trending + Long gamma, don't hedge (except maybe at EOD). Back and forth + long gamma, gamma scalp (hedge) as often as your directional skill allows, or choose some sort of band as suggested above. Short gamma + trending, hedge continuously. Short gamma + back and forth....

In practice, professionals choose their regime by lowering or raising vola (professional options trading software allows you to do this with surgical precision), since the effect it will have on the model is to give different gamma numbers depending on this vola, and indirectly generate less or more deltas as the underlying market moves. In some sense, this vola and skew adjustments are what separates the wheat from the chaff option traders, imo. When it is done right, and I have seen it done exquisitely right (by my ex-mm'ing firm), it is something to behold.

The point is you can embed any profitable trading system in knowing when to delta hedge, since it means you know what regime the market is in. If you knew that, just trade the underlying.

 

[sonoma]

Quote from nitro:

All this advice on delta hedging is trying to be helpful, but misses the fundamental point. If you knew what regime the market is in that day, you would know the perfect hedging strategy as well. Trending + Long gamma, don't hedge (except maybe at EOD). Back and forth + long gamma, gamma scalp (hedge) as often as your directional skill allows, or choose some sort of band as suggested above. Short gamma + trending, hedge continuously. Short gamma + back and forth....

In practice, professionals choose their regime by lowering or raising vola (professional options trading software allows you to do this with surgical precision), since the effect it will have on the model is to give different gamma numbers depending on this vola, and indirectly generate less or more deltas as the underlying market moves. In some sense, this vola and skew adjustments are what separates the wheat from the chaff option traders, imo. When it is done right, and I have seen it done exquisitely right (by my ex-mm'ing firm), it is something to behold.

The point is you can embed any profitable trading system in knowing when to delta hedge, since it means you know what regime the market is in. If you knew that, just trade the underlying.

Although I agree with nitro that “delta neutral” conversations are often misleading, directional risk is a component of trading that even retail traders need to consider. I think one point to not forget is that the holding period for a retail trader need only be to the point of discomfort, which means nowhere near expiry if a position nets out to be short premium around where the underlying is trading. In the interim, you should be looking for those chance events that turn your position sufficiently profitable that you can unwind the trade or roll it out. If you play this game, you have to keep your risk, including directional risk, under control, and that does not simply mean catastrophic tail risk, although that is important as well. With enough experience and knowledge, there is no reason that a retail trader can not be profitable. Your net liq won’t increase daily, but over time it will.

 

[nitro]

Quote from sonoma:

Although I agree with nitro that “delta neutral” conversations are often misleading, directional risk is a component of trading that even retail traders need to consider....

Don't misunderstand me, imo it is critical to delta hedge. I am saying that it is presented in this thread as if all you do is look at your position manager, and execute those deltas and off you go into +PnL heaven. Nothing could be further from the truth. But that you need some hedging strategy, that is not in question.

 

[sonoma]

Quote from nitro:

I am saying that it is presented in this thread as if all you do is look at your position manager, and execute those deltas and off you go into +PnL heaven. Nothing could be further from the truth...

Well said.