Need newbie guide to getting and staying delta neutral

S

sluzbenik

Let' say I have a largish ultra low-cost basis portfolio (did those calcs, unless the market crashes to say 500 I am better off tax-wise with gains on options) with an 80% correlation to the S&P 500 and lower beta (how much to hedge I am knowledgeable enough to calculate.)

For personal reasons I need to get this sucker delta neutral.

I would like to rebalance to delta neutrality on a monthly basis till the end of the year or whatever provides best risk/reward given transaction costs.

I have some experience with options, but mostly I have I am always underestimating time decay (or overestimating the move.)

I have considered using futures but I'm worried about getting margin calls if we get mega-upside and I have better uses for my cash than leaving it sit in a futures account protecting my butt. at least with a straight option loss is limited. Then again, it seems time decay always gets you in the end.

Can anyone point me to some resources? How can I find the sweet spot? Straight Dec puts? Rolling over monthly or bi-monthly?

Do I need to learn VAR analysis? That's slightly out of my league but if there are some easy-to-use tools out there I'd take it on.

Thanks much.
 
sluzbenik,
George Fontanills is the King of Delta Neutral trading methods. His book, The Options Course has excellent information about implementing a Delta Neutral Strategy.

The Options Course also has a companion workbook that has a couple of dozen pages to help you hone your skills.

These are 2 books that I use regularly, and they are two of the most popular books on my website for people looking at Delta Neutral strategies. You can read more about it at (scroll downt he page to see the review links):

http://www.options-trading-resources.com/Options-Trading-Books.html

Hope this helps.

Regards,
Steve
http://www.options-trading-resources.com/EliteTrSig

Option trading information and tools the pros wish they had! A former Chicago Mercantile Exchange employee reviews stock option trading software, books, and web sites and online income opportunity.
 
Quote from sluzbenik:

Let' say I have a largish ultra low-cost basis portfolio (did those calcs, unless the market crashes to say 500 I am better off tax-wise with gains on options) with an 80% correlation to the S&P 500 and lower beta (how much to hedge I am knowledgeable enough to calculate.)

For personal reasons I need to get this sucker delta neutral.

I would like to rebalance to delta neutrality on a monthly basis till the end of the year or whatever provides best risk/reward given transaction costs.

I have some experience with options, but mostly I have I am always underestimating time decay (or overestimating the move.)

I have considered using futures but I'm worried about getting margin calls if we get mega-upside and I have better uses for my cash than leaving it sit in a futures account protecting my butt. at least with a straight option loss is limited. Then again, it seems time decay always gets you in the end.

Can anyone point me to some resources? How can I find the sweet spot? Straight Dec puts? Rolling over monthly or bi-monthly?

Do I need to learn VAR analysis? That's slightly out of my league but if there are some easy-to-use tools out there I'd take it on.

Thanks much.
More...

i don't get it why do you want to get delta-neutral this way?
The best way for you to get delta-neutral is to sell it all ...
It makes no sense to use options for this unless you got a good view on volatility of the options which makes no sense at all considering your original question ... and it will be quite expensive ...
if you still don't want to become delta-neutral for some weird reason, futures is the way to go, it will be much cheaper than doing it with options still it will be a weird kind of hedge ... but imo the best way to do it is to sell your whole portfolio
 
A quick'n'easy way for stocks, if you use IB, is to look at the portfolio analysis page, and look at the overall portfolio delta.. (the total figure at the bottom of the table showing your holdings.. bottom right.

let's say the combined delta is 254.45
selling $25445 dollars worth of QQQQs will put you close to market neutral. You can never be spot on, unless you happened to hold the exact balance of stocks that made up the index, but it's better than nothing.

I'd maybe want to monitor it more often than once a month though, since it will vary. It's easy to adjst though.. just look at the current total delta, which will include any QQQQs you already hold as a hedge, and buy/sell more as indicated.
 
Quote from cvds16:

i don't get it why do you want to get delta-neutral this way?
The best way for you to get delta-neutral is to sell it all ...
It makes no sense to use options for this unless you got a good view on volatility of the options which makes no sense at all considering your original question ... and it will be quite expensive ...
if you still don't want to become delta-neutral for some weird reason, futures is the way to go, it will be much cheaper than doing it with options still it will be a weird kind of hedge ... but imo the best way to do it is to sell your whole portfolio
More...

I get it now, must be for tax reasons (we don't have taxes on stocks on my country) still think you should do it with futures as far as i know clean and simple and low margin costs. real delta neutral with options makes no sense unless you want to adjust all the time ...
 
I will look into futures more. Maybe I will just have to suck it up and stash more cash in a futures account. Luckily I have the cash, maybe others don't, thus they have no choice but to use options. Transaction costs are probably lower too.

As for taxes, they're bad. Really bad. Buy and hold still works. In some cases we don't even know the cost basis. Better to die and let the cost basis be erased!
 
Quote from sluzbenik:

I will look into futures more. Maybe I will just have to suck it up and stash more cash in a futures account. Luckily I have the cash, maybe others don't, thus they have no choice but to use options. Transaction costs are probably lower too.

As for taxes, they're bad. Really bad. Buy and hold still works. In some cases we don't even know the cost basis. Better to die and let the cost basis be erased!
More...
Although I don't trade futures I am under the impression that some brokers don't require a special account to trade futures. If that is true, than the stocks you own might provide the margin you need to trade futures assuming it was all in one account.

Don
 
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