Thanks for sharing the link...great article. I have a doubt regarding making straddles delta neutral. How often should we go of neutrality, have u done it on basis of some delta threshold or some time threshold?
So, an ATM straddle is by default delta-neutral. Since it is at the money, the delta of the call is around .49 to .51, and since the deltas of puts are negative, the delta of the same strike put will be -.49 to -.51.
When combined in a long position, the deltas automatically cancel out making the straddle delta neutral (e.g., -.50 + .50 = 0)
Because of this, the changes in the PnL of the straddle is mainly exposed to volatility, since minimal price changes are neutralized due to the near 0 delta
Thanks for your reply. Straddle is delta neutral when it is formed but it won't stay delta neutral as market moves in either direction. for example after 15 mins of forming a straddle, market moves down and current deltas of put are 0.70 and that of call are 0.35 in that case we are not delta neutral anymore. I asked what is that threshold of delta we need to start managing our straddle to make it delta neutral again?
So this experiment mainly just uses the straddle costs as the index itself that we make trading decisions around, but we don’t actually trade the index itself, much like the VIX.
It’s easy to track the continuous delta-hedged straddle as a programmatic index, but this would be very difficult to trade due to how often you would need to hedge. In code, it just takes the price of the newest ATM strikes without factoring in costs like closing the position and entering a new one.
If revisited to actually trade based on a threshold, the issue that we run into is a slow negative PnL drag from the transaction costs as realized volatility stays lower, the PnL would look just like the VIX (trending downwards with occasional large up moves) — so, a threshold based approach could work, but it wouldn’t be optimal and is better to just make decisions based on the index values
i do not have medium subscription but wish to read this article.
Hi there,
Here’s a free link to the article: https://medium.com/the-financial-journal/easily-making-the-vix-for-any-stock-3cefac69946b?sk=fdbf559f7d44e2832abcf49c8dc39145
Thanks for sharing the link...great article. I have a doubt regarding making straddles delta neutral. How often should we go of neutrality, have u done it on basis of some delta threshold or some time threshold?
Thanks!
So, an ATM straddle is by default delta-neutral. Since it is at the money, the delta of the call is around .49 to .51, and since the deltas of puts are negative, the delta of the same strike put will be -.49 to -.51.
When combined in a long position, the deltas automatically cancel out making the straddle delta neutral (e.g., -.50 + .50 = 0)
Because of this, the changes in the PnL of the straddle is mainly exposed to volatility, since minimal price changes are neutralized due to the near 0 delta
Thanks for your reply. Straddle is delta neutral when it is formed but it won't stay delta neutral as market moves in either direction. for example after 15 mins of forming a straddle, market moves down and current deltas of put are 0.70 and that of call are 0.35 in that case we are not delta neutral anymore. I asked what is that threshold of delta we need to start managing our straddle to make it delta neutral again?
Ah, I see what you’re saying.
So this experiment mainly just uses the straddle costs as the index itself that we make trading decisions around, but we don’t actually trade the index itself, much like the VIX.
It’s easy to track the continuous delta-hedged straddle as a programmatic index, but this would be very difficult to trade due to how often you would need to hedge. In code, it just takes the price of the newest ATM strikes without factoring in costs like closing the position and entering a new one.
If revisited to actually trade based on a threshold, the issue that we run into is a slow negative PnL drag from the transaction costs as realized volatility stays lower, the PnL would look just like the VIX (trending downwards with occasional large up moves) — so, a threshold based approach could work, but it wouldn’t be optimal and is better to just make decisions based on the index values
Thanks got it now....will be trying using this for determining entry and exit points for short straddles and more