30% returns with Delta hedging options

[myamit]

Hello All,

I'm thinking to execute following strategy. Options expert please advice whether this is appropriate and doable.

I want to take position in long dated nifty options

So chosen range is

Short 7500 CE (delta : -0.24)
Short 5000 PE (delta : 0.12)

Now considering this, I will short
Two lots of 7500 CE &
Four lots of 5000 PE

Now every Friday (or Monday), I'll adjust my position so that my position delta almost remain neutral.

Alternative I'll do the same when Nifty changes from 200+ points in one direction within a week.

I believe that by delta hedging, I'm controlling my price fluctuation risk and will earn time decay. This will result into much higher % return.

Experts ... please suggest your views.

Regards,

 

[augubhai]

Hello All,

I'm thinking to execute following strategy. Options expert please advice whether this is appropriate and doable.

I want to take position in long dated nifty options

So chosen range is

Short 7500 CE (delta : -0.24)
Short 5000 PE (delta : 0.12)

Now considering this, I will short
Two lots of 7500 CE &
Four lots of 5000 PE

Now every Friday (or Monday), I'll adjust my position so that my position delta almost remain neutral.

Alternative I'll do the same when Nifty changes from 200+ points in one direction within a week.

I believe that by delta hedging, I'm controlling my price fluctuation risk and will earn time decay. This will result into much higher % return.

Experts ... please suggest your views.

Regards,

I was observing these options for a few days in January.

For these far out options, one point that you should consider is the Vega. They have small deltas, but are more sensitive to Vega. Check out the daily (or even intraday) fluctuations in the bid/asks of these options. I think 5000, 6000, 7000 are liquid enough.

It might make sense to short when Vega is high.

 

[myamit]

I was observing these options for a few days in January.

For these far out options, one point that you should consider is the Vega. They have small deltas, but are more sensitive to Vega. Check out the daily (or even intraday) fluctuations in the bid/asks of these options. I think 5000, 6000, 7000 are liquid enough.

It might make sense to short when Vega is high.

Dear Augubhai,

I understand what you're saying. However I want to keep this as simple as possible. I'm okay with PE 5000 and CE 7500.

All what I want to know is there any chance to loose money if I keep correcting delta on regular basis?

What should be the frequency (time & certain volatility)

Am I making any big mistake in hedging delta only? If yes, what?

Regards,

 

[Somatung]

Dear Augubhai,

I understand what you're saying. However I want to keep this as simple as possible. I'm okay with PE 5000 and CE 7500.

All what I want to know is there any chance to loose money if I keep correcting delta on regular basis?

What should be the frequency (time & certain volatility)

Am I making any big mistake in hedging delta only? If yes, what?

Regards,

Your question sounds like: Where is the Afl for this kind of trading. Give it to me and I put it into my platform. Then I can go and sleep and wait for the money.

Men, there is no such thing with this kind of trading. This is option trading and not future trading. Know your break evens and act according to market moves in the direction of your break evens. This is the Afl and this you have to understand. This Afl has no fix rules, as options act in different ways according to market moves. Watch your legs, analyzes the option matrix and act when needed. That's it. Good luck.

 

[myamit]

Your question sounds like: Where is the Afl for this kind of trading. Give it to me and I put it into my platform. Then I can go and sleep and wait for the money.

Men, there is no such thing with this kind of trading. This is option trading and not future trading. Know your break evens and act according to market moves in the direction of your break evens. This is the Afl and this you have to understand. This Afl has no fix rules, as options act in different ways according to market moves. Watch your legs, analyzes the option matrix and act when needed. That's it. Good luck.

Somatung,

I guess either you do not know anything about options/trading or just want to jump on conclusions.

Firstly, I'm not asking for any AFL. Actually for this type of trading, I don't need one.

Secondly, in my post I just narrate a way to hedge delta while trading short strangle. I'm pretty okay with this method and trading for few months now.
I'm only asking opinion from options experts to show me loopholes that I may not have came across in this method yet.

Regards,

 

[jamit_05]

Hello All,

I'm thinking to execute following strategy. Options expert please advice whether this is appropriate and doable.

I want to take position in long dated nifty options

So chosen range is

Short 7500 CE (delta : -0.24)
Short 5000 PE (delta : 0.12)

Now considering this, I will short
Two lots of 7500 CE &
Four lots of 5000 PE

Now every Friday (or Monday), I'll adjust my position so that my position delta almost remain neutral.

Alternative I'll do the same when Nifty changes from 200+ points in one direction within a week.

I believe that by delta hedging, I'm controlling my price fluctuation risk and will earn time decay. This will result into much higher % return.

Experts ... please suggest your views.

Regards,

How much capital will one need?

What are expectations about Return on invested capital?

 

[myamit]

How much capital will one need?

What are expectations about Return on invested capital?

Jamit,

I'm not sure whether I can answer this straight.

But I guess one should at least be ready to deploy 10L and look for 30-40% returns.

Regards,
Amit Mehta

 

[jamit_05]

Jamit,

I'm not sure whether I can answer this straight.

But I guess one should at least be ready to deploy 10L and look for 30-40% returns.

Regards,
Amit Mehta

Fair enough.

Then would you also expect 50% draw-down (or loss) on a bad month?

 

[myamit]

Fair enough.

Then would you also expect 50% draw-down (or loss) on a bad month?

Loss... I very much doubt if you keep correcting your delta on regular basis.

Draw-down... yes but this depends on your definition.

Regards,
Amit Mehta

 

[jamit_05]

Loss... I very much doubt if you keep correcting your delta on regular basis.

Draw-down... yes but this depends on your definition.

Regards,
Amit Mehta

I do not intend to be patronizing. Am just trying to present a logical point of view.

See, I am an ordinary man; just a one man army. If I could earn 30% a month without seeing any loss, then imagine what a corporation could do! Corporations, with massive computers, with geniuses on their pay-rolls. They'd saturate that concept in matter of seconds.

Point is. In the stock market, there is always a loss, and most definitely there is always a draw-down. Theoretically, one could argue that if delta gets adjusted then all is fine... but theory is only the first step into reality.

A suggestion: If you do not have 10 to 15 years of hardcore experience in the stock markets, then do not go for advanced methods of deploying cash. Markets will wolf it down in a matter of days. Save this money.