Delta Neutral Option trading

2011-07-23T10:03:00.000-07:00

Hi Friends,

Keeping this post little short.

The time decay has started kicking in. Now the notional profit for the position is Rs 6240.

Delta for position has been heavy on call side with call option delta at 0.21 and put delta at 0.13. Thsi means we need to balance the position. We will do that by selling more puts (100) at the same strike.

The

position table has been updated as below:

Weekly Position Review

2011-07-16T07:43:00.000-07:00

Hi Friends,

Lets review our position for this week now.

Market moved a bit this week, but not to impact our position substantially. In fact our notional profit has improved further. The position is now showing Rs 2100

Profit

Lets now see if the position needs any adjustment.

Delta of both option position is now 0.20 but we are holding 150 short puts and 100 short calls. This means we need to balance the position.

The position status is given below as we analysed it.

We will balance the position by selling additional 50 calls. This will make the position now with 150 call and 150 puts.

The position is now balanced with delta of 0.20 on each side. Revised position is now as below:

Lets see the performance now over coming week.

Enjoy your trading.

Abhijit

Weekly adjustment to position

2011-07-10T08:52:00.000-07:00

Hi,

Last week's position has been reviewed. This is how it looks like now:

The position is in profit now with Rs 1132 profit being shown in the initial credit / debit field in top left corner of the first image.

Now lets analyse delta of the position as on today. Look into the first image and you will notice current delta of the position.

The sold puts have negative delta of 0.16 while sold call has positive delta of 0.29. We have 150 puts sold against 100 calls. This make total delta of calls @ 29 (100X0.29) while sold puts have delta of @ 24 (150X0.16). This means position delta is somewhat positive.

Considering the headwinds seen on horizon, this looks to be OK and we do not need to do any position adjustment. (Since the lot size available is 50, by selling 50 more puts. This would have taken the total delta to 32 (0.16X200). However, the position would have become heavier on the put side. Since we have somewhat negative view for next week, we are not doing that).

Until the next week then, sit tight and keep watching.

Regards

Abhijit

Introduction Post

2011-07-02T20:32:00.000-07:00

I have always been fascinated by delta neutral option trading. While i trade naked options right now, i have made numerous attempts to master delta neutral strategy. No guesses to say what has been outcome :) I would not be writing this post if i were successful.

However, i have not given up yet. While continue to trade naked options (writing them), i have revived this blog to do some kind of paper trading to apply delta neutral option strategy.

(I am assuming that anybody who reaches this blog page has some understanding of option basics. i am not getting into writing about these. Internet is full of study material on the subject)

I have set following ground rules for myself.

0. The strategy involves selling both call sand puts simultaneously and balancing position occasionally to ensure position deltas are same.

1. I will analyse position only at the end of week. (I understand, in real life, end of every day is better option, but at this juncture i just don't have enough time for it)

2. To have safety margin, i will sell options in the next expiry month.

3. Since these are paper trades, i am not getting into tracking margin requirement. i will only keep balancing positions with no focus on margins. However, real trades may not happen this way.

My expectations of return are not very high. i am looking at 5% return every month. If i am able to mange that consistently, i will be richest person in the world in 30 years :) (just kidding...) but 5% compounded return is huge any ways..

Let's now look at possible trade setup:

1. I am selecting 5300 put and 5900 calls as these have highest open interest in current month.

2. I will sell 5300 put and 5900 call of august expiry, traded at Rs 46 and Rs 54.75 as per Friday's closing prices.

3. The delta for these options (for August expiry ) are as below:
5300 Put - Delta 0.18
5900 Call - Delta 0.28

4. This means the put call delta is nearly 1.5 times of put delta. Hence to have delta neutral position, i need to sell 150 puts (3 lots) and 100 calls (2 lots)

5. The net inflow by this position is Rs 12,375. I am ignoring brokerage charges.
I track options using a free program called Hoadley's option strategy tool. I have enclosed screen shots for this position.

The Game is On.

I will review the position and balance it at the end of the week again. if you happen to reach here and read this blog post, do leave your comment. i will be motivated to write again.
Till Then, Enjoy your trades.