Delta Neutral Trading

Don't know if this will be of interest to option types, but every couple of weeks I get an email (freebie) from a bunch called "Delta Neutral Trading". I'm sure they offer all sorts of things on a commercial basis (haven't checked them out), but the email sometimes has some interesting content.

I've cut & pasted the latest one for your general interest.

Apologies if this has been covered before.

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Hi Tony


I was doing my search for option inconsistencies and
here is what I found.

I am looking at how much an option costs per day compared to an
option from a different month in the same futures market.

March U.S. Dollar futures contract closed at 82.23
(Jan. options follow the March Futures contract)


Jan. U.S. Dollar options have 25 days left until expiration.
March U.S. Dollar options have 81 days left until expiration.

Jan. U.S. Dollar 85 Call options settled at .07.
March U.S. Dollar 85 Call options settled at .47.

The March 85 Call is 6.7 times more expensive than
The Jan. 85 Call, but it ONLY has 3.2 times more time left.


Jan. U.S. Dollar 79 Put options settled at .04.
March U.S. Dollar 79 Put options settled at .36.

The March 79 Put is 9 times more expensive than
The Jan. 79 Put, but it ONLY has 3.2 times more time left.


When putting on any calendar spread, buy the cheaper cost
per day options and sell the more expensive.

Even if you are not putting on a spread, this is a great way to
choose which option to buy or sell.

For more information on these non-directional option
techniques, click below:

http://www.deltaneutraltrading.com/book.html


If you are looking for directional trading techniques in
the futures markets, click below:

http://www.deltaneutraltrading.com/TurningPoints.html


take care
dave





Rivera Publishing Inc.
3511 Riverdale Avenue
Riverdale, NY 10463
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Hi Dave,
Did you ever purchase this course? If you did what did you think? I'm looking for books to read on delta neutral strategies (posted a new thread on it). Thanks,

HL

hlpsg said:

Hi Dave,
Did you ever purchase this course? If you did what did you think? I'm looking for books to read on delta neutral strategies (posted a new thread on it). Thanks,

HL

Click to expand...

The basics of delta-neutrality is that you do not want to be exposed to directional moves in the underlying....
Say you think volatility is on the up then buy a straddle or stangle and work out your net delta from that stratagy and then delta hedge with correct number of underlyings so that your strat at this point in time is delta-neutral.....Of course you are hedged at this point in time but as the underlyign moves you will have to re-balance your delta hedge due to the gamma your positon has (gamma is the move in the delta wrt a move in the underlying). The frequenmcy that you do this depends on how much you wish to spend in re-balancing costs and your risk preferences. Now as you can see when you delta-hedged you are not exposed to any market moves (if you rebalance enough).....
You can do this will all kinds of stratagies to take advanateg of whatever you want. You can even be gamma neutral if you want and trade the 3rd derivative (speed) if you so wish......

is this helpful???

Robertral said:

You can even be gamma neutral if you want and trade the 3rd derivative (speed) if you so wish......

Click to expand...

How ?

Cheers.

Robertral said:

The basics of delta-neutrality is that you do not want to be exposed to directional moves in the underlying....
Say you think volatility is on the up then buy a straddle or stangle and work out your net delta from that stratagy and then delta hedge with correct number of underlyings so that your strat at this point in time is delta-neutral.....Of course you are hedged at this point in time but as the underlyign moves you will have to re-balance your delta hedge due to the gamma your positon has (gamma is the move in the delta wrt a move in the underlying). The frequenmcy that you do this depends on how much you wish to spend in re-balancing costs and your risk preferences. Now as you can see when you delta-hedged you are not exposed to any market moves (if you rebalance enough).....
You can do this will all kinds of stratagies to take advanateg of whatever you want. You can even be gamma neutral if you want and trade the 3rd derivative (speed) if you so wish......

is this helpful???

Click to expand...

Hi Robertral,
Thank you for the description. I know a little bit about delta neutral strategies and how they work. However it seems they only work when IV is low, because there is always option buying involved. If IV is high and the bought options lose value quickly later, you can still lose money. Is that correct?

Could you help to elaborate on being gamma neutral, and trading the 3rd deriavative? I do not understand what the 3rd deriavative is. Thanks.

HL

HL,

gamma measures the change in the options delta with respect to changes in the underlying stock price.
The gamma allows an arbitrageurs an opportunity to take advantage of this reward risk profile.When establishing gamma hedges, it can be useful to calculate the "shadow gamma", which is the change of the delta to the implied volatility.

The delta neutral gamma hedge can benefit from capturing gamma regardless of the direction of the stock price.

Characteristics to identify;
Theoretically undervalued or fairly priced option
Option with high gamma
Volatile common
Common with improving technicals/fundamentals

Risks to consider
Significant stock decline
Implied volatiliy declines (vega risk)
Time to capture gamma (theta risk)
Credit deterioration
Liquidity swings in Option

Cheers d998

Hlpsg

There are many ways to maintain delta neutrality, and not necessarily to involve buying options – if you thought IV was too high you could be selling them. In which case if you’re initially short options your position will become bigger and bigger and if you’re initially long options your position will become smaller and smaller. You also could use futures, CFD’s etc to stay DN. The DN strategy, as a strategy, isn’t affected by IV.

3rd derivative
I “think” he is referring to the third derivative being the rate of gamma change. 1st derivative is the Delta (rate of option price change) 2nd derivative is the gamma (rate of Delta change) 3rd derivative is the rate of Gamma change, 4th derivative is the rate of 3rd derivative change and so on and so on…..is that what you mean Robertal ?

I’m intrigued that he talks about gamma neutral in the same context as delta neutral, as though you can have both at the same time. Only a delta of +1 or -1 (synthetically long and short respectively) won’t change, i.e. gamma zero. If anyone can show me how to position for a delta of +0.5 and a gamma of zero (and make a profit) then I will have truly found the holy grail, and of course you’ll never hear from me again !

But I think I misunderstood what he was saying ?

Ducati

Any chance you could show a worked example of an arb involving an options gamma ? Cheers.

I frequently consult the Greeks,and frankly it's very hit and miss for smaller players-the spreads kill us in the UK.We all know vol. has left the building,and my instinct tells me it's because all hedge funds were selling options,and costing themselves and us,money in the process. All the smartarse traders get blown up sooner or later,so once the hedgies are dead it'll be business as usual. Re: delta/gamma neutral-the profit comes from theta -the decay on the short options-you have to ensure your longs are going to have a buyer,and it's notoriously hard to make money buying options.
PS.The bank USB decided after 10 years of trading that there was no way they could make money with covered calls-it's tough out here.

Windlesham1 said:

Re: delta/gamma neutral-the profit comes from theta -the decay on the short options

Click to expand...

Don't understand that. If you're gamma neutral, you're also theta neutral (the two have an inverse relationship).

Profitaker said:

Don't understand that. If you're gamma neutral, you're also theta neutral (the two have an inverse relationship).

Click to expand...

if you want to trade skew then how else are you going to do it????

Profitaker -you are absolutely right-I'd never noticed that before,and I've read a shedload of options books! In my real world experience of trading options,I try to tread the line between the academics,and the barrow boys-both have their winning methods,but academics seem to lose more often-ie institutional investors against traders. The Greeks are theoretical,which is why everyone whinges about them-you can only get the prices that are in the market,and in the UK we get royally screwed on anything less than 100 lots.
I shall now re-read Cottle's Optionserceptions and Deception.
- I had amnesia once,or was it twice?

"PS.The bank USB decided after 10 years of trading that there was no way they could make money with covered calls-it's tough out here".
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Windle,
Its amazing that it took them that long to figure that out.
why would a bank trade options that way and sacrifice so much up-side potential growth on stock for so little income and at same time leave themselves wide open on the down-side loss on stock.? it beats me!
They would have been better off writing "OTM puts or OTM Strangles" with a Hedge and use the capital as margin without buying any risk on stock.

Banks, if you read this thread and you want me to trade for you? my fees are only 20% of profits with no salary. If interested send me a private message. You can see my trades on:-
www.tacticaltrader.com

bull

ducati998 said:

HL,

gamma measures the change in the options delta with respect to changes in the underlying stock price.
The gamma allows an arbitrageurs an opportunity to take advantage of this reward risk profile.When establishing gamma hedges, it can be useful to calculate the "shadow gamma", which is the change of the delta to the implied volatility.

The delta neutral gamma hedge can benefit from capturing gamma regardless of the direction of the stock price.

Characteristics to identify;
Theoretically undervalued or fairly priced option
Option with high gamma
Volatile common
Common with improving technicals/fundamentals

Risks to consider
Significant stock decline
Implied volatiliy declines (vega risk)
Time to capture gamma (theta risk)
Credit deterioration
Liquidity swings in Option

Cheers d998

Click to expand...

Your def of shadow gamm is not tech correct......shadow gamma takse into account a move on the vol surface when a move in the underlying moves, so in affect its not the change in delta wrt to vol (dDELTA/dVOL is not shadow gamma).......

Windlesham1 said:

Profitaker -you are absolutely right-I'd never noticed that before,and I've read a shedload of options books! In my real world experience of trading options,I try to tread the line between the academics,and the barrow boys-both have their winning methods,but academics seem to lose more often-ie institutional investors against traders. The Greeks are theoretical,which is why everyone whinges about them-you can only get the prices that are in the market,and in the UK we get royally screwed on anything less than 100 lots.
I shall now re-read Cottle's Optionserceptions and Deception.
- I had amnesia once,or was it twice?

Click to expand...

Exactly how do you get fooked if u trade <100 lots???
SO is theta just theorectical?
Please come back with more useful comments when u understand what u are talking about, as people who are trying to learn about options will be very mis guided by your posts!!!!

Robertral you misunderstand me,I presume.
I did NOT say that Theta was theoretical I said the Greeks-when prices are constantly changing,by the time you've done the maths,the world has turned. As retail traders,we generally have to sell at the bid and buy at the offer-if that's misleading then my apologies. Do you trade or just pontificate from you ivory tower? If the former then bring it on!!!

This thread is beginning to get interesting.
I'll just sit back and watch from the side-line. :cheesy:

To hell with the gamma and the vega , I'm hapy with just the "theta and the Delta"

bull
Milk the theta and strangle the M-Maker :cheesy:

In my real world experience of trading options,I try to tread the line between the academics,and the barrow boys

Click to expand...

Not a bad way to operate IMHO.

-both have their winning methods,but academics seem to lose more often-ie institutional investors against traders.

Click to expand...

Don’t know if this is true or not. But even if it is, you wouldn’t know who is more profitable just by the frequency of loss, sorry to split hairs. I’d be surprised if institutions make less profit / lose more than retails traders – as a return on capital employed rather than absolute numbers of course, and in the long run.

The Greeks are theoretical,which is why everyone whinges about them-you can only get the prices that are in the market

Click to expand...

I couldn’t trade without constant reference to the BS model, but that’s just me. How else do you assess where the risk lies (?) especially if you trade a portfolio of index and equity options.

in the UK we get royally screwed on anything less than 100 lots.

Click to expand...

Presume you mean on spreads ? Think it depends what you trade and how you trade it. ESX is extremely liquid, equity options less so. If you want an immediate fill then yes, you have to sell the bid / buy the ask. But if you use a limit order, your broker should place your sell order on the ask, and buy order on the bid.

I shall now re-read Cottle's Optionserceptions and Deception.

Click to expand...

Any good ? Tried to get hold of a copy that through Amazon UK. Got dicked around so much I gave up in the end. Anyone here interested in selling a copy ?


Robertral

Any chance of an answer on my question to your Delta / Gamma neutral / 3rd Derivative ? Cheers.

This is SAD-Sunday morning-we should be nursing a major hangover with partner making full English!
I am actually quite concerned that having read Cottle,I have forgotten most of it.I have a substantial library,but one of the best is Trader Vic,imo.
Re: Spreads-I put in limit orders all the time,but the ESX is now so Illiquid I don't get filled. when I do get filled,the market has moved further than I expected(of course),and phoning the broker generally results in being told that I've been filled,when I would have moved the limit(once upon a time my broker would do this)
Re: BS I use the calculators from OIC,and iVolatility and there are discrepancies-not sure why.
Re:Cottle- you're welcome to borrow it,or indeed any of my books-I'm in ...................Windlesham

Windle

Many thanks for your kind offer. Might take you up on it if I can't buy one.

Same goes for anyone here-I bought my books for a 'song' so lending them is a low risk strategy,with potentially great rewards. I'm going to eat my porridge now.