Hello Senior members ,
I have just started my research on options and my questions might be a bit basic .
So , given that we are options writer and have a put written at a certain level X , when the markets approach X the delta of the options increases to +0.5 .
Now in order to hedge it , we try to make it delta neutral either by :
1. Selling a few calls whose deltas add up to -0.5 or close to it
or
2. Buy puts such that it comes to become -0.5 in order to hedge it .
My questions is , despite bringing the deltas to 0 or close to 0 and the time to expiry being only 10-15days (effects of volatility wouldnt be much ) , would we still suffer a loss ? and if so , to what extent (other than the cost of hedging)
can seniors kindly throw some light on this question pls
Thanking ,
Jack of Trades
I have just started my research on options and my questions might be a bit basic .
So , given that we are options writer and have a put written at a certain level X , when the markets approach X the delta of the options increases to +0.5 .
Now in order to hedge it , we try to make it delta neutral either by :
1. Selling a few calls whose deltas add up to -0.5 or close to it
or
2. Buy puts such that it comes to become -0.5 in order to hedge it .
My questions is , despite bringing the deltas to 0 or close to 0 and the time to expiry being only 10-15days (effects of volatility wouldnt be much ) , would we still suffer a loss ? and if so , to what extent (other than the cost of hedging)
can seniors kindly throw some light on this question pls
Thanking ,
Jack of Trades
This is how you can look at it.
The act is not controlling one greek, its all 3: Delta vs Theta vs Gamma
Which one goes like this:
1. Either you are NET Option Buyer and want to protect downside Theta.
2. You are an options writer and want to benefit from Theta, Time decay.
In most strategies, Delta will be favourable in a range and then act against the strategy.
Only in some strategies like Iron Condors etc will Delta not affect that much but even experts agree adjusting these complex ones is also not easy.
If you have sold a pair of PE/CE and bought a pair of PE/CE, how do u manage?
What can you roll? the entire 4 leg needs adjustment and become complex.
My questions is , despite bringing the deltas to 0 or close to 0 and the time to expiry being only 10-15days (effects of volatility wouldnt be much ) , would we still suffer a loss ? and if so , to what extent (other than the cost of hedging)
Secondly, if you are trying to gain from Theta (option writing), then along with Delta even Vega needs to be managed.
In short, any two of the greeks will need to be managed to profit from the third.
If you have a specific strategy, then u can get a specific answer.