Technically you did the correct thing. However things can get very tricky -
especially if you are short volatility as with this position. one thing to
consider is that gamma - and hence deltas - are not linear so that your
current 25 delta options do not stay at 25 deltas as the underlying (and
time or IV) move. Further, the volatility level you use completely
determines how you should calculate your delta level. the whole point to
delta hedging is that instead of playing price direction you are solely
betting on volatility. And since you are short vega, you are betting that
whatever iv level you sold the position at will be higher than aapl's
subsequent real volatility. If you over adjust your deltas, you will
eventually trade away all your potential profit. And the more you hedge
using stock, the more you will likely convert the position into a synthetic
short straddle or strangle. So make sure you have a decent risk graph so
you can literally see what your position is turning into.
Another consideration is "how" you manage your deltas. trading stock is the
cleanest method in that you are solely manipulating deltas and not messing
with any other Greeks. However, there are many times where you might want to
consider using options - either long or short - to sculpt the position. for
example instead of buying 150 shares you could have gotten the same delta
coverage by buying two 75 delta calls or buy selling three 50 delta puts and
so forth. Again, if you are new to this (or even very experienced) make sure
you see the impact of various strategies on a risk graph.
Finally, there is no set rule that says you need to be exactly delta neutral
with a position so try to decide if the resulting position is tolerable from
a risk/reward perspective more so than from a mechanical "now I have zero
deltas" rule-based approach.
Advice? My suggestion is to take it slow and let the market make some
significant moves - at least a standard deviation change - before
readjusting your delta risk. example: at 25% volatility and 230 price, aapl
has to move about $3.60 in a day to trigger a 1SD move. If you are adjusting
more frequently you are in effect buying back your short vega at a higher
price than the 25% I'm assuming is the vicinity you sold it at. When trading
short vega (i.e. delta hedging), if you over adjust you are in effect
locking in small losses all along the way. So the trick with this - and why
it requires a cast iron stomach - is to do nothing until you absolutely are
forced to make a move.
-----Original Message-----
From: OptionClub@yahoogro
Behalf Of L
Sent: Wednesday, March 24, 2010 10:15 AM
To: OptionClub@yahoogro
Subject: [TheOptionClub.
Dear All,
I'd like to get some feedback and guidance as I try my hand at Delta
Hedging.
I sold an Iron Condor on Apple, but have taken off the PUT side and am now
concerned only with the remaining Call Vertical.
It's a Call Spread on AAPL (6 contracts April of -230C/+240C)
at 230, my position has a delta of .25, so I loose a quarter for each dollar
apple rises.
I just bought 150 shares of AAPL at $230, reasoning that to neutralize the
.25 delta, I would need to buy 6 contracts X .25 of shares.
So for the time being, or for the next dollar rise anyhow, I'll balance the
loss in the spread by the gains in the shares. this will work until, if AAPL
keeps rising, then the Delta will rise too and I'd be back holding some
loosing Delta. At that point I'll consider rolling.
This is my first use of this technique, and I'd love to hear from those who
have used this idea before:
- did I do this right?
- where do I go from here? I guess I keep an eye on my overall Delta and
adjust the share position as needed to try to remain D neutral.
- Anything else you think I should be aware of.
Many thanks
Lance
------------
The goal of TheOptionClub is to provide a forum for members to work together
for the purpose of furthering our individual understanding option trading.
All messages and postings, and any materials circulated are provided for
discussion and educational purposes only. No statement contained in any
materials from TheOptionClub should be considered a recommendation to buy or
sell a security or to provide investment, legal or tax advice. All
investors are encouraged to consult a qualified professional before trading
in any security. Stock and option trading involves risk and is not suitable
for most people. There is no guarantee that any information provided is
accurate and, may in fact, be wrong. It is understood that the participants
in TheOptionClub have varying backgrounds and degrees of experience in
option trading, and that regardless of experience each member is considered
a student. As such, any information distributed through TheOptionClub
should be considered with a critical mind and not relied upon as an
authoritative source.
To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscr
To unsubscribe from TheOptionClub, send an email to:
OptionClub-unsubscribe@yahoogroups.com
No comments:
Post a Comment