Tuesday, December 1, 2009

[TheOptionClub.com] GOOG [was Re: Basic Calendar Question]

 

--- In OptionClub@yahoogroups.com, Ricky Jimenez <rickyjim@...> wrote:
> [...]
> Now contrast this situation will the rationale for making a
> position delta neutral at other times. I see, in this and other
> forums, diagonal traders explain how they sell just enough
> ATM calls against their LEAPS to make the total position DN.
> Of course the next day the market moves and they are no
> longer DN. Why did they think that was the best move in their
> quest to make money?

Because they don't pretend to know which way the market will move the next day.

The idea is that they want to eliminate, to the greatest extent possible, the risk caused by price movements.  Instead, they want to sell premium, and to make money from time decay and/or changes in volatility.

This is completely different from the viewpoint of traders of stocks, futures, etc., who have to choose a direction, and to either have guessed right, or to cut losses quickly.  Most of us have tried this at some point in our investment/trading careers, and have discovered that it's not so easy to do.  Delta-neutral traders have concluded that price movements are essentially random (though you can always find someone to provide a perfectly reasonable explanation after the fact...), and that attempting to predict direction is futile.

Martin

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