Delta Neutral Strategy (Long Nifty @ Long Puts)

[Agilent]

is nobody interested? should try my luck on moneycontrol.com

Have some patience Keerti... give us guys some time to recover from the Xmas parties

Seriously though, you dont sound like a newbie... and one wd require some expert knowledge to get back to you with a critique of yr strategies ...

IMHO : Ranbaxy is probably not the ideal choice of a straddle at this juncture ( or as the jargon goes; 'at this pt in time') since most of the juicy news is out. If its going to be range bound till Jan, you wd be better off having a bias ... but then, with Ranbaxy its like tossing the coin dont u think?... I doubt if even the co directors can predict which way the cases are going to unfold ( Are there any more cases left to unfold?)

 

[nautilus]

Hi

I am back and would like to start another deltal neutral trade soon. Please provide your input, so that I can start something most traders want. If any one wants a particular delta neutral strategy, please do let me know. Whatever the concensus, that will be the trade.

If there are unanswered questions from the previous posts, please come forward now.

Wastej

Hi Wastej:

Good to hear you are back, hope you are well.

Season's greetings.

Nautilus

 

[sar1479]

Hi All,
I have uploaded the tool http://www.megaupload.com/?d=S3EMP2DX
I have not entered the exipration date in the tool for Demo trade, so please go to the 'Asset Settings' tab and enter 'Expiration date'.

waiting for the bugs, comments and suggestion from Wastej and seniors.

Regards
Amit

Hi Amit,

can you send the Option tool at my email id [email protected], megaupload link is inactive.

thanks

vivek

 

[gandhiadg]

frm:gandhiadg
to: Mr.Wastej and Senior Members and experts on Delta Nuetral Trading:

I have been seeking calrification and valuable guidance on various aspects of Delta Nuetral Trading vide my earlier email given herebelow:

My earlier email contents:
===================

frm: gandhiadg

to: mr.wastej:

i am a novice to the concept of delta neutral trading and i would seek some basic clarifications on this strategy. i shall be obliged if you could enligten me on this basic fundamental concepts:

i. I have tried to follow the previous thread for delta neutral trading and tried to understand it conceptually but many doubts emerge

a. Is delta neutral trade sutiable for retail investor with limited resources as i have seen that there have been extensive b uying and selling of options as the time progresses

b. what are the type of returns one can expect by carrying out these series of transaction as has performed in the last delta neutral trade.

c. what is the logic behind making trade delta neutral after some reasonable movement of the underlying. Will it result in profit everytime or should the action be oriented to create credits and reduce the debits progressively and ultimately end up with the surplus at the end.

d. for retail investor investing in one lot future and two lot of option how would he have the flexibility to make trade adjustments everytime as the trade progresses. At all stages additional resources need to be made available to meet the required trade adjustments. How does a retail investor than can participate in the delta neutral trade or basically is it not suitable for the retail investor with limited resources.

Your esteemed clarifactions would be highly enligtening and would held to navigate better when the concept is clear .

thks in advance.
===========================

I am too keen to trade delta neutral as a retail investor and would seek valuable guidance on the possible trade adjustments for a 1 x 2 trade to make the entire trade profitable.

It would be extremely appreciated if Mr.Wastej and Senior Memebers and expert on Delta Neutral Trade could offer their valuable guidance and views.

Thks in advance.

agandhi.

 

[mosz]

I would also aprieciate the answers to the above questions. Thank you very much

 

[vince]

Gandhiadg, mosz

Let me try to answer your questions as best as I can.

A delta neutral trade is normally meant for well funded accounts.

The logic behind adjusting the trade periodically is to bring the delta of your position as close to 0 as possible and therefore reducing your risk. Carrying out an adjustment to a trade may not always be profitable.

There are various ways in which a delta neutral trade can be taken and the returns would be specific to the trade taken and market behaviour of course. It is impossible to comment on the returns in general.

Although your mentioned one lot futures and 2 lot options is sufficient to initiate a trade, additional funds would be required to make adjustments as and when required.

Lastly the guidance you seek for trade adjustments would again be specific to the trade taken and market behaviour. There are no text book rules available to follow.

I would suggest you take up a couple of paper trades to see if it suits your account size and temperement.

Regds

 

[SGM]

I would suggest you take up a couple of paper trades to see if it suits your account size and temperement.

Hi,
An excellent thread, It would wondeful if we can take another trade and do it all over again!
I would like to join in.
Regards
Sanjay

 

[SGM]

Delta Neutral Strategy (Season II)

I would suggest you take up a couple of paper trades to see if it suits your account size and temperament.

Date: 03 May, 2006
Delta Neutral Strategy (Season II)

We can start with todays prices.

I would prefer to have a position size of 2 NF and 4 Puts

Assumptions:
Market Bias: Nil
Observation: Nifty future is at huge discount to the spot value (25-30 points)

Capital: 300,000/- (as collateral available for Margin & Cash for M2M)
ROI Expectations: 5% i.e. 15,000/-

Action:
- Buy 200 Nifty Futures (25th May, 2006) @ 3600 = 720,000
- Buy 400 Nifty SP3600 Puts (25th May, 2006) @ 81.00 = 32,400

Margin requirement:
10% for Nifty Futures: 72,000/-
100% for options: 32,400/-
Cost of trade (brokerage etl): 1,100/-

Total Investment so far: 105,500/-

Will need lots of help from seniors, as I follow through this trade

Hope the student is ready enough for the teachers to appear!

Regards
Sanjay

 

[SGM]

Re: Delta Neutral Strategy (Season II)

Date: 03 May, 2006
Delta Neutral Strategy (Season II)

Observation: Nifty future is at huge discount to the spot value (25-30 points)

Hello,

This discount was distrubing me, as I suspected it would have an impact on the delta calculations. In an attempt to verify the delta neutral aspect of the trade, I wanted to calculate the values for myself.

Luckly my ODIN Diet has a options calculater available. Lets use it to check up on the delta values for this trade.

Spot Nifty is 3634.25
Delta for sp3600 Call is +0.5698 (aprox .57)
Delta for sp3600 Put is - 0.4302 (aprox .43)

Delta for put = 400 * -0.43 = 172,

Now as the NF was also at discount will the delta will be less than 1? (don't know yet how to get exact value, my odin does not do it)

In effect the trade we took may not be exactly Delta Neutral, but lets not get too technical about it right now, I am sure Gurus will guide us in due time...

Now the next step will be to trace nifty spots values on both sides, to establish points at which action should be taken to make the trade delta Neutral.

Regards
Sanjay

Lesson Learned: Now I know, why this statergy needs high cap!

 

[SGM]

Hi again,

In deciding for the follow up actions to be taken, we need to access the impact of changes in delta of the both sides of the trade. Two things will impact delta
1. Nifty level
2. Days to Expiry

One step at a time:

First of all lets see the impact of changes in nifty levels on the delta value of the put options.

We will consider the range of 3400 3800, we do not expect nifty to move in the range of 400 points in a day, although sensex can and does (remembering 28.4.06)

Case I (Going Going and Gone )

Nifty = 3650 Delta for SP3600 Put = -0.4323
Nifty = 3700 Delta for SP3600 Put = -0.4069
Nifty = 3750 Delta for SP3600 Put = -0.3822
Nifty = 3800 Delta for SP3600 Put = -0.3583

Case II (Meter Down, Down, Down)

Nifty = 3550 Delta for SP3600 Put = -0.4849
Nifty = 3500 Delta for SP3600 Put = -0.5119
Nifty = 3450 Delta for SP3600 Put = -0.5393
Nifty = 3400 Delta for SP3600 Put = -0.5668

The above calculations help us to understand how the swings in nifty will impact the delta of the put side of the equation.

Similar calculations can be done on daily basis with days to expiry 15, 14, 13 and so on

Now lets see the impact of Days to Expiry on the value of delta

Nifty = 3600

Days to Expiry: 16 Delta for SP3600 Put = -0.4583
Days to Expiry: 15 Delta for SP3600 Put = -0.4596
Days to Expiry: 10 Delta for SP3600 Put = -0.4670
Days to Expiry: 05 Delta for SP3600 Put = -0.4767
Days to Expiry: 04 Delta for SP3600 Put = -0.4791
Days to Expiry: 03 Delta for SP3600 Put = -0.4819
Days to Expiry: 02 Delta for SP3600 Put = -0.4852
Days to Expiry: 01 Delta for SP3600 Put = -0.4896

To summarize it, the ve value for delta increases as the put option comes into money and decreases as it goes out of money, also the ve value for delta for the put option increases with every day as expiry comes near.

Now to calculate the impact on the delta value of Nifty Futures

We have a problem here, we do not know if we consider the values of nifty spot or nifty futures. We have used spot values to calculate delta for options and we will be buying and selling futures, hence the confusion. Anyway as always there is only one way to know, to make a choice, so I choose NF values. Also it is clear from the posts above that the delta value of long ftrs is 1.

Now as the price swings, we balance the delta on either side to get a delta neutral trade.

But with only 2 lots NF and 4 of Puts to balance the trades the gaps will have to be high, maybe too high to do anything meaningful.

Guess, we are at a dead end!

Will need to do some more number churning.....

(My crude calculations tell me that we will have our next trade only after 60 to 75 points on the up side and 50 to 60 on the down side.)

Regards
Sanjay

Lesson Learned: Never ignore the previous Lesson Learned!