Delta Hedging

[Beenjammin]

Hi All,

Does anyone have experience in dynamic delta hedging sold naked calls?

Im curious as to how often people recalculate the hedge in practice for ASX listed derivatives, and how well/indifferently it works in your experience - tips hints etc. Theres stuff out there for US and UK markets but can't find a lot for the domestic market.

Thanks!
B

 

[Grinder]

Did it the odd time awhile back with stocks for calls looking to go ITM, prefer hedging with alternate positions though. Trade mostly the index now so morphing, adjusting is my prefered method. Sorry can't be of more help.

 

[cutz]

G’Day Beenjammin,

With dynamic delta hedging are you intending on selling calls and buying stock so you end up with a position delta of 0, for example you sell a BHP call with a delta of .350 for example, you then buy 350 BHP shares to neutralize delta, you adjust when position delta deviates away from 0 at a predetermined point.

Does this sound about right guys, on the modeling tool it looks like a short straddle but i guess management is a lot different.

Ah, so many possibilities.

 

[Beenjammin]

G’Day Beenjammin,

With dynamic delta hedging are you intending on selling calls and buying stock so you end up with a position delta of 0, for example you sell a BHP call with a delta of .350 for example, you then buy 350 BHP shares to neutralize delta, you adjust when position delta deviates away from 0 at a predetermined point.

Does this sound about right guys, on the modeling tool it looks like a short straddle but i guess management is a lot different.

Ah, so many possibilities.

Hi Cutz,

(And thanks Grinder)

Your description of Delta hedging is spot on. Im trying to get my head around the practicalities/advantages/disadvantages of using it as a risk management method Vs a dynamic stop loss strategy which involves buying and selling the underlying as it swings up and down across a price point under strike. As always it pays to listen to the voice of experience to tell you the 95% of what the textbooks neglect to consider.

Fundamentally Im trying to establish a strategy to manage whipsaws - it'd be fairly easy to chew through the call premium with a few ill timed wiggles. Im curious if anyone else has developed a strategy i can review to see if it is appropriate for my situation.

 

[jackson8]

Hi Cutz,

(And thanks Grinder)

Your description of Delta hedging is spot on. Im trying to get my head around the practicalities/advantages/disadvantages of using it as a risk management method Vs a dynamic stop loss strategy which involves buying and selling the underlying as it swings up and down across a price point under strike. As always it pays to listen to the voice of experience to tell you the 95% of what the textbooks neglect to consider.

Fundamentally Im trying to establish a strategy to manage whipsaws - it'd be fairly easy to chew through the call premium with a few ill timed wiggles. Im curious if anyone else has developed a strategy i can review to see if it is appropriate for my situation.

hi
could be an expensive exercise to be continually buying and selling your way out of hedging with the underlying. not only your strikes getting whipsawed but the underlying will be doing the same.
what sort of time frame are you writing over and atm otm or itm options?

is it better to hedge yourself at point of sale and take that extra risk out of the equation right from the start. many ways to do that

as cutz mentioned what strategy exactly are you looking at? from previous posts you have mentioned naked calls a few times.

have you looked at selling naked puts as opposed to what sounds like more of a covered write strategy

 

[cutz]

hi
could be an expensive exercise to be continually buying and selling your way out of hedging with the underlying. not only your strikes getting whipsawed but the underlying will be doing the same.
what sort of time frame are you writing over and atm otm or itm options?

Hello again.

I’m probably a little out my depth here as I don’t dynamic delta hedge but I assume Beenjammin is looking at selling calls trading at a high IV and bringing position delta down to zero by buying the appropriate amount of stock, I also gather that the sold calls would be ATM and front month so theta would be running pretty high, so in this case with delta running at around .50 you only need to purchase 500 stocks per contract ( less stock is required if you start going out of the money because delta decreases). If you’re using a decent broker like IB and only adjust once or twice a week I guess it wouldn’t be too expensive.

Keep us posted Beenjammin, this is an interesting topic, i may have a crack next month.

 

[cutz]

Your description of Delta hedging is spot on. Im trying to get my head around the practicalities/advantages/disadvantages of using it as a risk management method Vs a dynamic stop loss strategy which involves buying and selling the underlying as it swings up and down across a price point under strike.

Good morning,

In my view, the reason you’re hedging delta would be to capture maximum theta but not exposing yourself to adverse price movement so I guess dynamic delta hedging is certainly more attractive than buying enough stock to cover the face value of the contact if the underlying hits your strike, this will give you too much exposure to the downside.

 

[jackson8]

hi beenjammin

heres a link for some extra reading on the subject, may help you get your head around the concept
i know i am still struggling with it as i think it requires multiple contracts and a large account to make it realistically work to your favour
best of luck
http://www.thepitmaster.com/options/deltatrading.htm

 

[mazzatelli1000]

Good morning,

In my view, the reason you’re hedging delta would be to capture maximum theta but not exposing yourself to adverse price movement

More of a Vega play

 

[Beenjammin]

Thanks everyone for your input n this, most appreciated.

Ive been playing around with spreadsheets and backtesting stuff like mad for the past few days.

Ive reached the conclusion delta hedging probably isn't for me - interesting theory but it is highly dependant on how often you are prepared to adjust your hedge. The potential for capital loss if you have a few overnight downward gaps is too great and could easily wipe out any money you got for selling the premium in the first place.

So im back to where I started (at least a lilttle better informed).

Thanks again,
Ben

 

[cutz]

Yeah,

It’s interesting in theory but in practice it’s a bit awkward on the Australian market, especially with the difficulty in short selling stocks, my main game are XJO options and there doesn’t seem to be an instrument available to carry out this type of hedging, apparently XJO futures are available with a point value of $10 but I don’t think liquidity is to good on these so I haven’t pursued it, I haven’t even seen any quotes or trade history, maybe someone could shed some light.

 

[Grinder]

same cutz, that's why I don't do it.