Delta Neutral strategies

[rajeshn2007]

The option trading risks pertaining to options sellers are:

1. Options sold may be exercised at anytime before expiration.

2. Covered Call traders forgo the right to profit when the underlying stock rises above the strike price of the call options sold and continues to risk a loss due to a decline in the underlying stock.

3. Writers of Naked Call Write risk unlimited losses if the underlying stock rises.

4. Writers of Naked Put Write risk unlimited losses if the underlying stock drops.

5. Writers of call options can lose more money than a short seller of that stock on the same rise on that underlying stock. This is an example of how the leverage in options can work against the option trader.

6. Call options can be exercised outside of market hourssuch that effective remedy actions cannot be performed by the writer of those options.

 

[columbus]

The option trading risks pertaining to options sellers are:

6. Call options can be exercised outside of market hourssuch that effective remedy actions cannot be performed by the writer of those options.

Is there anything wrong here?

 

[trader.trends]

The option trading risks pertaining to options buyers are:



3. European style options (like nifty options) which do not have secondary markets on which to sell the options prior to expiration can only realise its value upon expiration.

Am I missing something? Can you elaborate that?

 

[rajeshn2007]

6. Call options can be exercised outside of market hourssuch that effective remedy actions cannot be performed by the writer of those options.

Is there anything wrong here?

Hi columbus,
Stock options can be exercised after-market-hours, which puts the option writers helpless.

 

[rajeshn2007]

Am I missing something? Can you elaborate that?

Hi trader.trends,
Our market have the option to close the calls/puts in secondary markets, but they cannot be exercised as stock options.
But in developed markets European options can only be closed on the expiry day only.

 

[rkkarnani]

Hi columbus,
Stock options can be exercised after-market-hours, which puts the option writers helpless.

Rajesh, Can u please recheck the info!!! Options as far as I know 'cannot' be exercised 'after' market hours!!! The same are exercised during the live market. Yes they are assigned only after close!!! Though the end result is same for the option writer!!!

 

[rajeshn2007]

Rajesh, Can u please recheck the info!!! Options as far as I know 'cannot' be exercised 'after' market hours!!! The same are exercised during the live market. Yes they are assigned only after close!!! Though the end result is same for the option writer!!!

Hi Rkkarnani,
options can be exercised after market hours. sure

 

[VJAY]

Yes RK...stock options are exercised after market.....but not for nifty options...IMO

 

[trader.trends]

Yes RK...stock options are exercised after market.....but not for nifty options...IMO

vjay
Nifty options are European, hence are automatically exercised on the expiry day not before

 

[rajeshn2007]

Delta Neutral Hedging.

Delta Neutral Hedging : Step 1 - Determine the total delta value of your current position.

If you are holding 100 shares, then you are long 100 deltas. If you are holding options, then you need to determine the total delta of your options by multiplying the delta value of each option by the number of options.

If you are holding 4 contract(100 shares) of call options with 0.5 delta each, then your total delta value is 0.5 x 400 = 200 deltas. So your are net short.

Delta Neutral Hedging : Step 2 - Determine the kind of delta neutral hedge needed.

If your position is long deltas, then you will need negative deltas as hedge and if your position is negative deltas, then you will need long deltas as hedge.

Long call options / Short Put options = Long deltas

Short call options / long put options = Negative deltas

If your position is long 100 deltas, you will need to produce short 100 deltas in order to result in zero deltas. You can do that through selling call options or buying put options.

Delta Neutral Hedging : Step 3 - Determine the total delta value needed to hedge.

After determining what kind of hedge your position needs, you should now work out how many of those hedges you need by the following formula : (Total Delta Now / 100) / Delta Value Of Chosen Hedge Options

If your position is long 100 deltas, you will need to produce short 100 deltas in order to result in zero deltas. Assuming both the at the money call options and put options both have 0.5 delta value.

(100/100) / 0.5 = 2(100 shares-lot size) contracts

You can either buy 2 contracts of put options or sell 2 contracts of call options to perform a delta neutral hedge on the position.

Just posting the basic strategies, later some actual nifty/stock positions.