Straddle Delta Hedging

[HwoodL]

:?:Hi Guys,

I am a newbie to options, so I hope one of you can help me with my question.

I created a spreadsheet that calculates the number of calls/puts that need to be purchased or sold in order to hedge a Straddle. I took a long straddle position as I wanted to be long vol. The equity had just been merged with another company, plus it was about to release its reporting figures so I figured vol would be high (Ending of Dec period).

I am don't understand why with the equity I have chosen the total cost of the position is at a loss. Is being long vol not the position to be taken with the equity? The equity I have used for this exercise is ATVI.

Below is a copy of the spreadsheet that I have written and the highlighed yellow rows in the data sheet are the values I used. Can somebody please provide me an insight to this position, and why the cost is -13858.13275.

You speedy response would be much appreciated to this option newbie :cheesy:

Thanks,

 

[grantx]

Hwoodl,

I had a quick look at this. On the delta hedging why aren’t both calls and puts shown as debits rather than just puts? They’re both debits.

The Put deltas are too high for the calls – ideally the should be equal or equidistant from their respective strikes.
For example, 0.20248 call and -0.81449 put. In other words the put has four time more exposure on the downside compared to the calls 2. In simple terms the put will outperform the call (gain or lose) 4:1.

The implieds look somewhat uniform. How were they determined?

“Equity had just been merged with another company, plus it was about to release its reporting figures so I figured vol would be high”.

These facts being well known I suspect you bought the options at a high volatility. More likely this will drop once the figures have been. released and your long (volatilty) positions will reduce. You should be short volatility (short straddle).

I don’t see any point in hedging this position – I think you end up with neutral(ised) position.

Grant.

 

[AJJ]

Position calculation

Hwoodl,

With regard to the position you want to value.
I would like to tell you that I have an online option manager site, where you could enter your whole position and it will produce the delta's, gammes ... for you.
The site "straddleplanner.com" is free an specially made to answer questions like you have.

The site is still in beta. So please let me know if you have any comments or ideas.

AJJ