# Delta Neutral Options Trading Strategy

 Discuss Delta Neutral Options Trading Strategy at the Derivatives within the Traderji.com; Delta Neutral Options Trading Strategy To understand the Delta Neutral Strategy we need to clearly ...

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 Derivatives Discuss Futures & Options in securities whose value is derived from an underlying instrument.

#1
19th February 2007, 08:39 AM
 Super Moderator Join Date: Jun 2004 Posts: 1,787 Thanks: 2 Thanked 793 Times in 128 Posts

To understand the Delta Neutral Strategy we need to clearly define Delta.

Delta is nothing but a ratio comparing the change in the price of the underlying asset (eg:cash market price of RIL) to the corresponding change in the price of a derivative (eg:F & O price of RIL).

So in the case of Call Options a delta of 0.8 means that for every Rs.1.00 the underlying stock increases, the call option will increase by Rs.0.80.

In the case of Put Options the Delta will be reversed (negative) because as the underlying security increases, the value of the option will decrease. So a put option with a delta of -0.8 will decrease by Rs.0.80 for every Rs.1.00 increase in the underlying price.

An in-the-money call option nears expiration, it will approach a delta of 1.00, and as an in-the-money put option nears expiration, it will approach a delta of -1.00.

So what is Delta Neutral Options Trading Strategy?
The term "Delta Neutral" refers to any strategy where the sum of your deltas is equal to zero. So, for instance, if you buy 10 call options, each having a delta of 0.60 and you also buy 20 put options, each having a delta of -0.30 you have the following:

........(10 .x .0.60) .+ .(20 .x .-0.30) .= .6.00 .+ .-6.00 .= .0

Your position delta (total delta) is zero, which means you are delta neutral.

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#2
19th February 2007, 05:48 PM
 Member Join Date: Aug 2005 Posts: 28 Thanks: 3 Thanked 1 Time in 1 Post
Re: Delta Neutral Options Trading Strategy

Your starting post could have been a little more expansive on the subject. It is my personal experience in the Indian markets that pure delta neutral startegies barely generate returns.You definitely need a BIAS on which to base your strategy upon, i.e buying futures and puts OR selling futures and buying calls.
Rather, if Delta Neutral is used before a major event like budget or company results can be beneficial due to the huge volatility.
Infact in case of INFOSYS it sometimes gives returns on both sides if squared off at oppurtune times.

I eagerly await your views on this...
rgds
#3
19th February 2007, 06:00 PM
 Super Moderator Join Date: Jun 2004 Posts: 1,787 Thanks: 2 Thanked 793 Times in 128 Posts
Re: Delta Neutral Options Trading Strategy

Quote:
 Originally Posted by indiatrader Hi Traderji, Your starting post could have been a little more expansive on the subject. It is my personal experience in the Indian markets that pure delta neutral startegies barely generate returns.You definitely need a BIAS on which to base your strategy upon, i.e buying futures and puts OR selling futures and buying calls. Rather, if Delta Neutral is used before a major event like budget or company results can be beneficial due to the huge volatility. Infact in case of INFOSYS it sometimes gives returns on both sides if squared off at oppurtune times. I eagerly await your views on this... rgds indiatrader

As a rule I do not trade options because of the inefficient way it is set up on the NSE. However if I do I generally prefer to sell out of money calls in a strong downtrend and sell out of money puts in a strong uptrend.
#4
19th February 2007, 06:12 PM
 Member Join Date: Feb 2006 Posts: 103 Thanks: 129 Thanked 68 Times in 30 Posts
Re: Delta Neutral Options Trading Strategy

Quote:
Once again thanks.
Mfire
#5
19th February 2007, 06:28 PM
 Member Join Date: Aug 2005 Posts: 28 Thanks: 3 Thanked 1 Time in 1 Post
Re: Delta Neutral Options Trading Strategy

thanks for the quick answer. However, you have hit the nail on the head when you have said that "I do not trade options because of the inefficient way it is set up on the NSE".
the trick of any advanced option strategy would be to play on this inefficiencies. As inherently and inefficient market would be inefficient or highly inefficient for only a short period of time and then it would swing towards efficiency.
i have seen in practice that options tend to be highly overpriced before the 10th of every month but as expiry nears , they are very much at par with the Black-Scholes model. So the option selling strategies could be used before 10th and the option buying strategies after 10th.
As for your naked option selling strategies, they do involve unlimited risk. More so over, it's success depends upon the view of the trader and how accurate he is. A rapidly falling market could turn around just as quickly and there is no safe mechanism to stop loss options other than buying opposite futures.... ifyou get what I mean.
rgds
 The Following User Says Thank You to indiatrader For This Useful Post: chintan786 (22nd September 2008)
#6
22nd September 2008, 10:50 PM
 Member Join Date: Apr 2008 Location: India. Posts: 1,778 Thanks: 1,516 Thanked 1,395 Times in 627 Posts
Re: Delta Neutral Options Trading Strategy

Quote:
 Originally Posted by Traderji This thread was in reply to http://www.traderji.com/78282-post40.html As a rule I do not trade options because of the inefficient way it is set up on the NSE. However if I do I generally prefer to sell out of money calls in a strong downtrend and sell out of money puts in a strong uptrend.

Thank you for all your dedications throughout the forum. Mnay regards...

But why you have said, "I do not trade options because of the inefficient way it is set up on the NSE" Can you explain how it is inefficiently setup by NSE?

Thank you,
Hari.
#7
11th October 2008, 10:09 AM
 uasish Guest Posts: n/a
Re: Delta Neutral Options Trading Strategy

The Black Scholes Module ,which is used by exchanges to determine the Fair value is highly skew-ed in relation to 'Time' value input.
Suppose a stock has risen by Rs 1.00 in comparison to yesterday's close obviously the Option price will detoriate as TIME increases hence to combat that spot Price has to rise/fall Fast.
Hence it is prudent to USE that in our advantage by Writing than Buying.
#8
28th March 2011, 12:43 PM
 Member Join Date: Jan 2006 Posts: 350 Thanks: 148 Thanked 136 Times in 74 Posts
Re: Delta Neutral Options Trading Strategy

regards,
naren
#9
28th March 2011, 01:37 PM
 Moderator Join Date: Nov 2010 Location: Idhar ich, aur kidhar? Posts: 18,374 Thanks: 53,061 Thanked 31,416 Times in 13,424 Posts
Re: Delta Neutral Options Trading Strategy

How is the delta calculated ?
#10
31st March 2011, 08:33 PM
 Member Join Date: Jan 2006 Posts: 350 Thanks: 148 Thanked 136 Times in 74 Posts
Re: Delta Neutral Options Trading Strategy

Anybody explain How is DELTA calculated?

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