What Options Plays are available in this situation ?

[xandman]

Important to note is the DELTA of the option you buy as a hedge. You may be hedged in quantity of shares. But at the inception of the trade, you will have less than <50c protection for every 1 dollar of an adverse move against you.

So if you want a perfect delta hedge at the time of inception, you will actually need 2 calls right in a strike that is almost equal to your short entry price. These would be 2 calls with a delta of 50 times 2 to make 100 deltas equivalent to 1 underlying.

If the trade moves against you, the calls gain Delta and you now have a position that benefits more from the upside than the downside.

Don't be obsessed about maintaining a perfect delta hedge at all times. It is better to be more aware of how much heat you will be exposed to over price, time and the IV changes. Deltas will change constantly.

Model it and play with the variables.

 

[ET180]

Hey folks

Im a newbie re options (actually little idea in fact)
i was wondering if the experienced option players on ET might part with some of their wisdom on the following situation .....

How would you hedge if you went short from the RED line shown and if you believed with 100% certainty that price will go to the blue line within the next 5 days ? Say we dont know though how high price will go in this case and thus i want to minimise the "heat" very soon after going short at the red line price....
Very grateful for any Option advice.
thanks, best John

View attachment 286541

If you have 100% certainty then the only reason you need to hedge if to protect yourself from getting squeezed out of the position. So in that case, maybe don't short the shares, but instead buy puts. If you're certain that it goes to the blue line, then it's pretty straight forward to calculate the ideal position depending on how long you think it takes to get there.

 

[TheDawn]

Important to note is the DELTA of the option you buy as a hedge. You may be hedged in quantity of shares. But at the inception of the trade, you will have less than <50c protection for every 1 dollar of an adverse move against you.

So if you want a perfect delta hedge at the time of inception, you will actually need 2 calls right in a strike that is almost equal to your short entry price. These would be 2 calls with a delta of 50 times 2 to make 100 deltas equivalent to 1 underlying.

If the trade moves against you, the calls gain Delta and you now have a position that benefits more from the upside than the downside.

Don't be obsessed about maintaining a perfect delta hedge at all times. It is better to be more aware of how much heat you will be exposed to over price, time and the IV changes. Deltas will change constantly.

Model it and play with the variables.

This is way too overhedged. LOL It's not the hedging at the inception of the trade that matters; it's how the hedging works during the life of the underlying that does. This perfect delta hedge at inception is assuming constant delta throughout the life of the option. In reality delta changes with the change of underlying and how fast the underlying changes and also via gamma. This ATM option with <=0.5 delta that you took is not going to stay at <=0.5. With the underlying going the opposite direction, i.e. the direction of the option, that 0.5 delta is going to increase closer to 1 so the option price will increase much faster, reaching pretty much a 1:1 basis with the underlying really fast. So an ATM option with 0.50 delta is way too much; you are not going to make any money when the market does go your way and never moved in the opposite direction. A much lower delta will more than suffice.

 

[taowave]

You/I need to know the implied vol,prices and DTE of options availabe.
Without that,you are trading blindfolded.

Im assuming you know short future/long call is a synthetic put.
Fwiw,the buying of 2 .50 calls to be fully hedged is a synthetic straddle..
Where is IV??

It appears you have a price target where you cover so you limit your profit to apx 600 pts..
The blue box top looks like 600 pts of pain. You mentioned 1000 points of heat..Is that your typical risk reward??

Dont like what I am seeing.

so fellas re below , am i neutral within the CYan box after buying a CALL Option ? thanks

View attachment 286580

 

[xandman]

This is way too overhedged. LOL It's not the hedging at the inception of the trade that matters; it's how the hedging works during the life of the underlying that does. This perfect delta hedge at inception is assuming constant delta throughout the life of the option. In reality delta changes with the change of underlying and how fast the underlying changes and also via gamma. This ATM option with <=0.5 delta that you took is not going to stay at <=0.5. With the underlying going the opposite direction, i.e. the direction of the option, that 0.5 delta is going to increase closer to 1 so the option price will increase much faster, reaching pretty much a 1:1 basis with the underlying really fast. So an ATM option with 0.50 delta is way too much; you are not going to make any money when the market does go your way and never moved in the opposite direction. A much lower delta will more than suffice.

Are you arguing or emphasizing my point? It was a theoretical construct to make him dig deeper on delta effects on an option during its lifetime. He could be scratching his head why he did not have a 1:1 protection as price moved to the 2nd red line.

I clearly fleshed it out in way that would be digestible. And, provided a course of action to understand it further.

 

[treeman]

This is obviously a question that’s only possible if you didn’t have a plan when the position was implemented. My recommendation is to exit.

 

[taowave]

Problem is you are turning a directional Short bet into a synthetic straddle and the guy is a complete newbie...

We know he wants to be short..We have an idea of his risk reward ratio..Question is he better off naked short( with a stop),buying a put or buying a putspread/selling call spread..

Hes obviously gree,so simpler is better

Are you arguing or emphasizing my point? It was a theoretical construct to make him dig deeper on delta effects on an option during its lifetime. He could be scratching his head why he did not have a 1:1 protection as price moved to the 2nd red line.

I clearly fleshed it out in way that would be digestible. And, provided a course of action to understand it further.

 

[xandman]

Problem is you are turning a directional Short bet into a synthetic straddle and the guy is a complete newbie...

We know he wants to be short..We have an idea of his risk reward ratio..Question is he better off naked short( with a stop),buying a put or buying a putspread/selling call spread..

Hes obviously gree,so simpler is better

...and so we go into a recursive loop. Does it really seem that I was recommending that he do that trade with 2 calls?

Does it seem that synthetic relationships were not considered in an even earlier post? Would this be the time to lay it on him?

Should we just tell him that options are way over his head and that he should not even try?

 

[beginner66]

hey Fellas , thanks xandman,Et180,TheDawn and taowave...im listening hard to what you guys are saying...thank you for the words of advice ...big thank you

i have learnt this in last 24 hrs + researching Scholes

Abstract:
We'll see how volatility translates into the price of an option and how we can turn that into a trading strategy:

• We are directional indifferent (meaning that we don’t care whether the market goes up or down).
• The price of the ATM straddle equals to the price of Call + Put, which equals (approximately) 0.8× Spot ×Vol ×Time (in 1-year term). “0.8” is to do with approximation to the normal distribution
• Volatility can be translated into ATM straddle price and then the “ATM straddle breakeven” can be calculated— note that we didn’t specify which kind of volatility; “ATM straddle breakeven” shows us how much we need the market to move to breakeven against the cost of the strategy.
• We actually trade variance (as volatility is not additive). The problem with variance is that it’s not that intuitive to investors, so it’s easier to use the square root of variance (i.e. volatility).
• We know how to price options (kind of), how to approximate our ATM straddle breakeven (rounded), and how volatility and time affect our option price
• We test our option sensitivity to the underlying parameters in B&S formula: Spot, Rates, Time, Volatility) by using nonparametric approximation
• We simply shift the different parameters up/down and test the option’s sensitivity to each underlying parameter separately.
• While time-consuming process, Black-Scholes came up with an easier way to measure the option’s derivatives — “The Greeks”: closed-form formulas that represent the sensitivity of the option to the different parameters
• 1st order derivatives of underlying spot price , implied volatility and passage of time (aka, “time decay”) Delta (Δ), Vega(ν) and Theta( Θ)
• 2nd order derivative Gamma(Γ), underlying spot price.

The Volatility-Gamma-Theta Triangle:

• As options traders we care about : Theta (time decay) and Gamma (our delta sensitivity to the underlying spot change), both are highly sensitive to volatility.
• If we BUY volatility, we want our gamma to be HIGH. the opposite If we SELL volatility
• The higher the volatility, the higher our theta (i.e. the option will decay faster), and vice versa, hence
• Volatility has a DIRECT effect on theta, and INVERSE effect on gamma
• We should maintain our options portfolio delta-neutral (or in other words, indifferent of the market direction), by using “Dynamic Hedging: essentially just buying/selling the asset
• The dynamic hedging: each day we will buy/sell the accumulated options portfolio’s delta once the market reaches (or goes beyond) our daily breakeven move; we buy low and sell high; The more volatile the market, the greater our hedging profits.

still taking what you guys have written and my research... again much appreciated
If you see something incorrect with above notes please dont hesitate to shout out.
Ill keep at it.

cheers