How to keep the delta at zero at real time basis
- Thread starter florance
- Start date
Lets look at a simple example . Long futures 4 lots long puts 8 lots(atm) to begin with. That gives us a delta neutral position with the delta at 400. Say at the end of day the stock moves up, that would change the delta of the puts say by 150delta (the delta of the futures remaining constant at 400). You would have to bring back the delta of the trade to neutral position by adjusting for these 150 deltas.
You could sell futures to reduce the delta or
sell calls or
buy more puts.
How you do it is up to you.
Hope that helps.
You could sell futures to reduce the delta or
sell calls or
buy more puts.
How you do it is up to you.
Hope that helps.
In my view, when u take action to adjust the delta, the net delta jumps in steps.
Eg - buy futures - delta changes by +1
buy ATM PUT - delta changes by -0.5 (ITM put will have higher delta whereas OTM put will have lower delta)
sell ATM CALL - delta changes by +0.5 (ITM Call will have higher delta whereas OTM Call will have lower delta)
(note - I am taking delta for "each 1 Rs change in the underlying" hence it is smaller number. You can very well use it for "each 100 Rs change in underlying" and the net result gets multiplied by that factor)
For eg - if one has started with +4 delta due created by 4 long futures and -4 delta created by buying 8 put. On 50 Rs. drop in nifty, the net delta will be = +4 for futures (it never changes ideally) but for PUT, it will change from -0.5 to -0.65 (for eg.).. so the net delta now is = +4 - (0.65*8) = -1.2.
So to adjust this whatever step u take, the net delta will not be 0 but some other number slightly away from 0. say in above example, if you sell 1 future, then net delta is still -0.2,
So, IMO, this delta neutral strategy can be implemented effectively if you are trading in large quantity, say 1000 NF contract, then in above example your portfolio delta will be
-120.. which u can bring down by selling 120 futures contract. But for small portfolio, one can't sell 1.2 future contract.
Another points that makes this strategy difficult for small account is the brokerage, the time required to monitor it regularly, liquidity and slippage with each order.
Workaround could be to 1) Instead of looking at ZERO delta strategy, look for say +0.2 to -0.2 delta as acceptable target. And then monitor the position delta on periodic basis say once a day / once in a few days etc and take corrective action to bring the delta into your comfort zone.
Happy Trading
Eg - buy futures - delta changes by +1
buy ATM PUT - delta changes by -0.5 (ITM put will have higher delta whereas OTM put will have lower delta)
sell ATM CALL - delta changes by +0.5 (ITM Call will have higher delta whereas OTM Call will have lower delta)
(note - I am taking delta for "each 1 Rs change in the underlying" hence it is smaller number. You can very well use it for "each 100 Rs change in underlying" and the net result gets multiplied by that factor)
For eg - if one has started with +4 delta due created by 4 long futures and -4 delta created by buying 8 put. On 50 Rs. drop in nifty, the net delta will be = +4 for futures (it never changes ideally) but for PUT, it will change from -0.5 to -0.65 (for eg.).. so the net delta now is = +4 - (0.65*8) = -1.2.
So to adjust this whatever step u take, the net delta will not be 0 but some other number slightly away from 0. say in above example, if you sell 1 future, then net delta is still -0.2,
So, IMO, this delta neutral strategy can be implemented effectively if you are trading in large quantity, say 1000 NF contract, then in above example your portfolio delta will be
-120.. which u can bring down by selling 120 futures contract. But for small portfolio, one can't sell 1.2 future contract.
Another points that makes this strategy difficult for small account is the brokerage, the time required to monitor it regularly, liquidity and slippage with each order.
Workaround could be to 1) Instead of looking at ZERO delta strategy, look for say +0.2 to -0.2 delta as acceptable target. And then monitor the position delta on periodic basis say once a day / once in a few days etc and take corrective action to bring the delta into your comfort zone.
Happy Trading
We need to consider Deltas and their asymmetry of returns in real time scenario.
This means that the option's profit-and-loss profile isn't equal given similar movements by the underlying stock. For example, let's assume that you bought an at-the-money call with a delta of 0.50. As the stock moves my way, the delta increases. As the delta increases, my exposure to the market also increases. We should think it this way. In an up move, the call gains delta. In other words, after the stock's first one-point upward move, your option premium will gain roughly Rs 0.50 . However, the next one-point up move may now see a delta of 0.53. Thus, as the stock goes up another point, we gain Rs 0.53 instead of Rs 0.50. We have gained delta. This will continue until we reach a delta of 1, whereupon a one-point up move in the stock will create a one-point gain in the option's price.
Regards,
Sagar
This means that the option's profit-and-loss profile isn't equal given similar movements by the underlying stock. For example, let's assume that you bought an at-the-money call with a delta of 0.50. As the stock moves my way, the delta increases. As the delta increases, my exposure to the market also increases. We should think it this way. In an up move, the call gains delta. In other words, after the stock's first one-point upward move, your option premium will gain roughly Rs 0.50 . However, the next one-point up move may now see a delta of 0.53. Thus, as the stock goes up another point, we gain Rs 0.53 instead of Rs 0.50. We have gained delta. This will continue until we reach a delta of 1, whereupon a one-point up move in the stock will create a one-point gain in the option's price.
Regards,
Sagar
This topic is very intriguing. May I ask what is the purpose of maintaining a zero delta in one's position?
Perhaps this is a nub question but this is a new horizon for me.
Thanks.
Pete
Perhaps this is a nub question but this is a new horizon for me.
Thanks.
Pete
Try this for basics
http://www.traderji.com/derivatives/11539-delta-neutral-options-trading-strategy.html
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