Delta Netural Strategy (short Strangle)

[alokdaga]

Hi,

Firstly I must complement you for your patience and detailing !! I have been going through your thread - seems very interesting. Have you summarised any trading rules for it?

I will be most happy to go through it.

Regards

Alok

This strategy is good any time as long as there is good premium to be collected. Specially when the implied volatality is high. Its even better when the market is sideways.

To a good trader, the market is nothing else but source of regular income, depending on his own resources (capital) and skills.

WasteJ

 

[[email protected]]

Hi Alokdaga,

The Trading rules, as the name implies, is to stay in Delta Natural position at all times.
The market forces will change the delta position of your trade and the trader has to bring it back into the delta natural position - It is that simple.

Regards,

Wastej

 

[chheda]

Hi Harish,


What is a delta, to understand one needs to read the Greeks of the option? All most all brokers web site provide this information, in addition one can read at the web site of yahoo as well as BSE and NSE also. In laymans language the delta of an ATM (At the Money) Call option is +. 50 and the Put option is -.50. Once the option is in the money the delta keep increasing as the stock price keep rising. Deep in the money (ITM) options have almost 1 delta. (-1 in case of Put Options). All stocks have +1 delta for Long Stocks and negative One (-1) for Short Stocks.

Most market makers do not hold the risk in their hands for more than 6 seconds (In USA). Depending what order they receive, immediately they off load the risk by bringing their position to delta neutral position. They are able to do because the margin requirements of Market Makers are far less than that of Traders.

Let us consider that the MM has received order for 10 Nifty Call Options (10X100=1000 X +. 50 (ATM has .50 Delta)= +500. MM as soon as fills this order he is risking 500 Delta. So he in real sense is negative 500 delta because he sold positive delta. In order to hedge his position he will go long 500 future contracts as each contract has +delta (+1). From time to time he will than adjust his position to bring it to delta netural and thus will avoid any risk in the market. In the end the option sold will expire and he will capture all the time value of the option.

Think of a Race Bookie, They offer lowest odds for the favorite horse and the least favorite horse will have the highest odds. Though, they try to give better odds on least favorite horses, by doing this they try to match their liability (In case the favorite wins) to the premium they have collected, by offering higher odds on the other horses, participating in the race, thus reducing their risks. It is not a new method; this has been going on for years.

In order that most members of the Traderji forum can get benefit from such strategies, I will start another trade, which is rather going to be much simpler. It will be just Long Nifty Futures and Long Put option. Please keep coming back.

I am sorry; as I have not been able to understand the question 4, please explain the same once again.

Regards,

Wastej

Thanks WasteJ

For Your explanation . Plz keep coming back
Q4 .can we summarized any trading rules for Delta Netural Strategy , so that we can develop mechanical trading system ?

Regards,
Harish Chheda

 

[[email protected]]

Hi Harish,

The only thing I can add to already explained strategy, is to adjust the position whenever there is imbalance of 100 deltas. Now you have to find out a way to incorporate this into your mechanical trading system.

With this the Question and Answer session ends now. Thanks to all the participants.

Good Luck

Wastej

 

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Re: Delta Netural Strategy (Long Nifty future & Long Put)

I am going to start the new trade. The trade will consist of going long Nifty futures and at the same time buying long puts on the future. This will be a delta natural Strategy.

If most members would like me to go short on Nifty futures, than I can go short and enter the trade that way.

I will have time to write up the daily comments on one trade only. Therefore,please give me feedback as in which direction you would like me to go?

Wastej

 

[chheda]

Hi Harish,

The only thing I can add to already explained strategy, is to adjust the position whenever there is imbalance of 100 deltas. Now you have to find out a way to incorporate this into your mechanical trading system .

Good Luck

Wastej

Thanks WasteJ for your answer with the key to mechanical trading system .

I am going to start the new trade. The trade will consist of going long Nifty futures and at the same time buying long puts on the future. This will be a delta natural Strategy.

If most members would like me to go short on Nifty futures, than I can go short and enter the trade that way.

I will have time to write up the daily comments on one trade only. Therefore,please give me feedback as in which direction you would like me to go?

Wastej

Thanks for starting new trade with new strategy .
I think the trade will consist of going long Nifty futures and at the same time buying long puts on the future.

Thanks and Regards,
Harish Chheda

 

[[email protected]]

Hi Traders,

I have started new delta neutral trade "Delta Neutral Strategy - Long Nifty futures and Long Puts" in the Introduction forum.

Please visit the forum and read it. It is basic and very simple to understand. It is going to be good for the new learners.

Good Luck

Wastej

 

[[email protected]]

I am glad that the forum heading has changed to show the correct forum ie "Deriatives."

Thanks to Traderji.

Wastej

 

[[email protected]]

To all readers:

Please visit "Delta Neutral Strategy - Long NIfty futures & Long Puts" forum under DERIATIVES to see the new trade in progress. Daily actions and updates are being provided on this thread. It will be very informative for new traders.

Wastej

 

[SGM]

Hello,

Following the steps mentioned in this thread, I am taking a new mock trade and will be following it up till closed.

The Last Trade Futures (25 MAY, 2006) on Friday MAY 12, 2006 was Rs.3633.00.

The closing prices for the selected options were as follows

Call SP 3700 @ 53.85
Call SP 3650 @ 74.60

Nifty Futures @ 3633

Put SP 3600 @ 65.40
Put SP 3550 @ 47.90

Action:

1) Sell 600 calls options on the future of nifty index with Strike price of 3700 @ 53.85
This will give us a credit of 600 * (47.90 – 1.50) = Rs.27,840.00
We are considering Rs.1.50 as the cost of transaction. (Arrived at assuming brokerage rate of 0.03% plus taxes)

2) Sell 600 put options on the future of nifty index with Strike price of 3550 @ 47.90 This will give us a credit of 600 * (53.85 – 1.50) = Rs.34,410.00

By taking the above action we have got a credit of total Rs. 62,250.00 on account of premium collected. Now we have to try to protect this premium until expiry of the options i.e., May 25, 2006.

Happy Trading!

Regards
Sanjay