Delta Neutral Trading Question

When calculating delta of a potential trade, should it be on theoritical prices or actual market price of option? In other words, should delta zero be on theoritical or actual market price?

I am based in Bangalore and would like to meet other people interested in technical analysis, option trading and delta neutral trading. Anyone interested? Let me know

Nitin

Market price

Nitin: Should be market price. Implied volatility increases dramatically in times like these and a Long delta neutral strategy at this time is dangerous because of the high IV today. Also, we have about 10 days left and time decay can really kill you if you're long options in a delta neutral strategy. A short straddle or strangle, or a butterfly may work better at these times.

I'd be interested in speaking further, I'm not in Bangalore (used to be , just moved to Mumbai) but am keen to explore algorithmic trading strategies and back test etc. (deepakshenoy at *****)

Thanks Deepak,
Let's chat sometime. My gtalk id is nitinsy. I have been trying some delta neutral strategies without much luck. Because I only buy options, I end up losing most of the times due to high time decay.

Right now I am playing a strangle - Bought Nifty PE 5200 & Bought Nifty CE 5600. Delta is pretty much neutral. Both of these had IV < Annualized volatility when I bought them. Right now I am in profit and I suspect a big move after the budget today.

How has your experience been with Delta neutral trading?
Nitin

For ease of understanding and for further fruitful interactions in the Thread, I propose please elaborate with an illustration the "Delta Neutral Strategy". thanks.

Open Interest

Hi,

Will anyone explain me Open Interest and its impact on market.

To understand, Delta neutral strategy, it is important to define the DELTA first.
Delta = change in option price for unit change in the price of underlying.
For example RELIANCE 2600 call option, current option price say = 110 and delta = 0.5. so if RELIANCE gains by 10 points, then new option price will be 110+0.5*10 = 115.
Delta depends on whether option is in-the-money or out-of-money.
Delta for a stock is always 1 i.e. 1 rs change for each 1 rs change in underlying which is nothing but stock itself here.

Delta Neutral strategy deals with creating combination of stock and options or 2 option positions of different strike price so that net delta is equal to ZERO.
For example buy RIL Stock (giving you delta value of 1) and selling (-ive deltal) 2 RIL 2600 call options where delta of option is .5 (giving you delta of 2*(-0.5) = -1)
So this complete trade will have net delta of 0 (+1 for long stock leg and -1 for sold call option leg).
So if RIL falls by 10 Rs, your sold call option will gain by 10 (i.e.-0.5*10*2).
And same is for the gain of 10 Rs in stock, the fall in sold call option price will be 10.

The strategy makes more sense in volatile market where people want to control the risk. Implementation of this is lot more tricky because delta of option is not constant and it keeps changing as the stock price moves.

Hope I have not confused you much with my explanation. It is one of the advance strategy in Options world used by many Hedge funds.

Happy Trading,
Regards.
AW10

Q1. Consider a one year put swaption, which has an underlying swap as a four-year swap. A put swaption gives its buyer the right to enter into a swap as a floating rate payer and if he exercises the option, receives fixed rate from the swap. The strike price of the put swaption is 9% and the notional principal is $10 million. At expiration of the swaption, the spot rates on zero coupon bonds of various maturities turned out as below:

Year Yield on Zero Coupon Bond
1 7.5%
2 8.0%
3 8.4%
4 8.7%

You are required to calculate the payoff from the put swaption (Assume 360 days in a year)

Q2. An Indian Bank has sold three-month European call option on $2 million with a strike price of Rs 45.10. The current rupee dollar exchange rate is Rs 45.30/$. The annual volatility of rupee-dollar exchange rates is 6%. The 91-day T-Bill rate in India is 4% p.a and 91-day US T-Bill rate is 1% p.a.

You are required to find out the position the bank should take (using options) to make the position delta neutral.

Q3. The Current market price of ABB's stock if Rs 290. The Following European call an put options are available in the market.

Option Strike Price Premium Expiration(Months)
Call 280 24 6
Put 280 3 6
The risk-free interest rate is 6% p.a

You are required to find out whether there is any arbitrage opportunity available in the put and call prices. If no, justify why not. If yes, show how you can make arbitrage profit.

Hey Kid .... this not your curriculum problem solving thread .....

This real world ...real money is created and destroyed here