Date: 04 May, 2006
Delta Neutral Strategy (Season II)
Hi again,
What a great learning experience it has been!
After doing few more calculations and if/then analysis using an excel sheet, I have come to a conclusion that going ahead with this trade will not be practical. The size of the trade does not give us a chance to succeed. If we want to continue with this size we may not be able to make a trade for 100 more points on either side, which anyway throws the delta neutrality out of the window.
Lets for the time being keep the jargon aside and look at essentially what we were trying to do here.
We bot 2 nifty futures and 4 nifty Put options at the same time. So in effect we are going long and short at the same time. What is the logic behind taking such a trade?
The assumption here is that there would be movement in the market and there will be bouts of volatility. We have to take advantage of these movements by capturing profits at appropriate points. The strategy is to keep increasing the credits and reducing debits.
If the market goes up we bring home the profit in futures and if the market goes down we bring home the profits on Puts.
In our case, having only 2 NF, does not give us any maneuverability, so the chances of even a breakeven are bleak, didnt we hear it before Big Money attracts More Money and i guess the small accounts provide it!
Failure is a great teacher, only if one is ready to Listen!
What we can do now is increase the size of the trade and continue...
So what would be the size to take this trade? Yes, the bigger the better, but if we want to use it to make real profits, as Vince pointed out we need to look at the money management aspects also.
So lets reorganize the trade to consist of 8 NF s and 16 Put options at the same rates. (hmmm, paper trading.)
One more thing .. .. what would you say if I tell you to .. ..
Cut your profits, and let the losses run.
Essentially this is what we do, but not exactly, as we have a hedged position we will be able to manage if the market takes a huge adverse turn.
Have a few unanswered questions, will make a new post for that.
Regards
Sanjay
Delta Neutral Strategy (Season II)
Hi again,
What a great learning experience it has been!
After doing few more calculations and if/then analysis using an excel sheet, I have come to a conclusion that going ahead with this trade will not be practical. The size of the trade does not give us a chance to succeed. If we want to continue with this size we may not be able to make a trade for 100 more points on either side, which anyway throws the delta neutrality out of the window.
Lets for the time being keep the jargon aside and look at essentially what we were trying to do here.
We bot 2 nifty futures and 4 nifty Put options at the same time. So in effect we are going long and short at the same time. What is the logic behind taking such a trade?
The assumption here is that there would be movement in the market and there will be bouts of volatility. We have to take advantage of these movements by capturing profits at appropriate points. The strategy is to keep increasing the credits and reducing debits.
If the market goes up we bring home the profit in futures and if the market goes down we bring home the profits on Puts.
In our case, having only 2 NF, does not give us any maneuverability, so the chances of even a breakeven are bleak, didnt we hear it before Big Money attracts More Money and i guess the small accounts provide it!
Failure is a great teacher, only if one is ready to Listen!
What we can do now is increase the size of the trade and continue...
So what would be the size to take this trade? Yes, the bigger the better, but if we want to use it to make real profits, as Vince pointed out we need to look at the money management aspects also.
So lets reorganize the trade to consist of 8 NF s and 16 Put options at the same rates. (hmmm, paper trading.)
One more thing .. .. what would you say if I tell you to .. ..
Cut your profits, and let the losses run.
Essentially this is what we do, but not exactly, as we have a hedged position we will be able to manage if the market takes a huge adverse turn.
Have a few unanswered questions, will make a new post for that.
Regards
Sanjay
