Evenly Buying and Shorting 2 Different Stocks with Options

[Brennen81 10]

Hello. I am hoping someone could help me with the scenario proposed.

 

I would like to Long CELG and Short C, evenly, with options. What I am tying to figure out is how to have them react in the same way. For example. Lets say I thought they were going in their respective way by 10%. CELG up and C down. The direct stock purchase/short way is pretty simple, buy and short the same $ worth of each stock. Now with options it's not so simple. These are the possibilities I am thinking. Starting with delta neutral. (Numbers are as of close today)

 

CELG - $142.60......C - $47.30

 

CELG May 23 142 Call....$5.35 (Bid).......0.537 Delta

C May 23 47.5 Put........$1.03 (Bid)......-0.525 Delta

 

Would either of the following make sense:

 

1) Purchase 3 C puts because CELG stock is about 3 times the price of C

2) Purchase 5 C Puts because the CELG Call is about 5 times the price of the C Put

 

 

Maybe I am way off from the beginning. But if anyone has any more experienced thoughts, I would love to hear.

 

Thanks

Brandon

[SIUYA 11]

both would make sense, but if you want the equivalent exposure to buying equal amounts of $ of the underlying then then best thing to do is keep it - dollar delta neutral.

Dollar delta neutral to me means that you want to keep the same equivalent amount of the underlying represented by the options delta. This way if there is a 10% move up in one, and 10% move down in the other, you will benefit the same as if its holding the underlying.

so you would go for the 1:3 ratio.

 

However, as you have convexity and time decay unless you want to rehedge you have to think of the outcome as binary - ie; at these levels I will exit and not rehedge.

Simply because there are lots of different scenarios possible, and the convexity means your dollar deltas will change.