[Northern boy]

Originally Posted by darthtrader »

To me options are so deceptive and complex that the only way to play them is to be on the other side of that trade so your collecting premium and not paying it out.

I was just wondering why you can't sell an option, delta hedge it, and collect theta(premium).

[Northern boy]

Anyway, I agree with DarthTrader. There's no sense being on the buy-side of options because of -theta. (Unless you know something, or found a system that averages a good return after -theta)

[BlowFish]

Originally Posted by Northern boy »

I was just wondering why you can't sell an option, delta hedge it, and collect theta(premium).

Tricky as the delta changes as the option moves in and out of the money. The trouble with any arbitrage is that arbitrageurs trade risks in similar markets. There are several things that can change the relationships of those risks.

[sevensa]

Originally Posted by Northern boy »

Anyway, I agree with DarthTrader. There's no sense being on the buy-side of options because of -theta. (Unless you know something, or found a system that averages a good return after -theta)

Couldn't you say the same thing for pretty much any system? There is no sense following it unless you know something or it averages a good return?

[Northern boy]

Originally Posted by BlowFish »

Tricky as the delta changes as the option moves in and out of the money. The trouble with any arbitrage is that arbitrageurs trade risks in similar markets. There are several things that can change the relationships of those risks.

suppose you sell the option 10% OTM to avoid the biggest delta changes, making your hedging job easier.

Sure neutralizing delta is a job... but for the slight inaccuracies you make... won't the collection of Theta be predominant?



I don't know everything about options pricing, but theta seems to me to be a one way street without any trade-offs. Why can't you just isolate it? I'm sure the sell-side on Wallstreet runs delta hedging programs for every option they sell, unless they're making a directional bet.

So why can't the average Joe?

[darthtrader3.1beta]

Originally Posted by Northern boy »

Sure neutralizing delta is a job... but for the slight inaccuracies you make... won't the collection of Theta be predominant?

Well first, when are you going to come back to stocktalk? I miss you posting there...
Second when are you going to put that high powered canadian brain to 2d futures instead of 3d options? Your wasting alot of mental energy here..
Third...
What will kill your idea here are those "slight inaccuracies", namely transaction cost, the fact you can't buy .25 of a contract, you have to buy 1, and the spread if your not a market maker.
Delta neutral strats sound great theoretically...the problem I found is it seemed to put the strat into practice is that I would have to buy an 1/8th of a contract every 20 minutes, forgetting that I would have to transact with no commision and with the spread neutral or in my favor to really sit delta neutral...Even if that could be done at the retail level..the catch is you still have to buy a full contract and not 3/8ths a contract...So then your really taking a complex directional position then if its basically impossible to sit neutral...
If you can accept that then the even bigger rub is there is obviously someone who sits above your strategy with lower commisions, faster execution and most important with vastly more capital who can fractionalize the strategy as far as single contracts go impossibly better than you because of a lack of capital...They can buy 1/16th of a contract at the aggregate of your strategy while you can not..No edge.
Theta is constant, you can't gain an edge with Theta if you want to be neutral.
The other rub is with Vega...you have to bet against those guys mentioned not just on delta, but against your understanding of vega...Thats a total fools game...Even ignorant understanding of vega can get you a Phd from a top university, someone will have it right that you have to beat...its a fools game.

[Northern boy]

Originally Posted by darthtrader3.1beta »

Well first, when are you going to come back to stocktalk? I miss you posting there...
Second when are you going to put that high powered canadian brain to 2d futures instead of 3d options? Your wasting alot of mental energy here..
Third...
What will kill your idea here are those "slight inaccuracies", namely transaction cost, the fact you can't buy .25 of a contract, you have to buy 1, and the spread if your not a market maker.
Delta neutral strats sound great theoretically...the problem I found is it seemed to put the strat into practice is that I would have to buy an 1/8th of a contract every 20 minutes, forgetting that I would have to transact with no commision and with the spread neutral or in my favor to really sit delta neutral...Even if that could be done at the retail level..the catch is you still have to buy a full contract and not 3/8ths a contract...So then your really taking a complex directional position then if its basically impossible to sit neutral...
If you can accept that then the even bigger rub is there is obviously someone who sits above your strategy with lower commisions, faster execution and most important with vastly more capital who can fractionalize the strategy as far as single contracts go impossibly better than you because of a lack of capital...They can buy 1/16th of a contract at the aggregate of your strategy while you can not..No edge.
Theta is constant, you can't gain an edge with Theta if you want to be neutral.
The other rub is with Vega...you have to bet against those guys mentioned not just on delta, but against your understanding of vega...Thats a total fools game...Even ignorant understanding of vega can get you a Phd from a top university, someone will have it right that you have to beat...its a fools game.

lol high powered brain, I can't do math for my life. I'm not saying I'm gonna do it (delta hedge), besides I'm pretty strapped for free "investing cash" since my directional bets from last year went to shit .

If I knew then, what I know now... Anyway.


I'm not studying options to try and game from them, I was reading about em because I'm trying to piece a strategy together that exploits noise differences in correlating assets. But it has a hole in which I thought options could fill. Maybe I'll ask your help with it later,...


The problems you mentioned with delta hedging, regarding contract sizing.... those are only really problems in the futures market are they not? If you're delta hedging an option in forex or stock there's no problem. As for the problem of commissions... play it on a larger time frame... commission is insignificant then.

Playing roulette with vega... I dunno... but in theory it's a 50/50 risk/reward to the blind isn't it? It can benefit you as much as it can hurt you. And can't you hedge it with the VIX?


ps: Isn't Stock Talk full of spam now? UGh... I wish I was betting directional now.... not then... market bottom? i want money for high beta stocks

[Northern boy]

...Until I found out about volatility swaps. lol.

I KNEW there was an easier way!

Their construct and pay off is simple. You arrange a notional amount, a strike (V%), and the pay-out at maturity is: 'notional' * (realized volatility - strike)

there's no premiums involved. They just trade your book.

Google: "Salomon Smith Barney Exotic Equity Derivatives Manual" to read further about the products.

There's: 'Realized', 'Implied', and 'Capped' volatility swaps. If looking to hedge vega, Implied is what you want.

Ta-da! This drops the standard dev on my strategy at least 5%


ps: Nate, clear your inbox. I can't send you any messages. :p