36 lines
2.7 KiB
Plaintext
36 lines
2.7 KiB
Plaintext
Chapter 6: Ratio Call Writing 167
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the protective points even closer together. Thus, as the position continues to improve
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over time, the writer should be constantly "telescoping" his action points and finally
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roll out to the next expiration series. This is generally the more prudent move,
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because the commissions to sell stock to close the position and then buy another
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stock to establish yet another position may prove to be prohibitive. In summary, then,
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as a ratio write nears expiration, the writer should be concerned with an ever-nar
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rowing range within which his profits can grow but outside of which his profits could
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dissipate if he does not take action.
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COMMENTS ON DELTA-NEUTRAL TRADING
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Since the concept of delta-neutral positions was introduced in this chapter, this is
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an appropriate time to discuss them in a general way. Essentially, a delta-neutral
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position is a hedged position in which at least two securities are used - two or more
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different options, or at least one option plus the underlying. The deltas of the two
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securities offset each other so that the position starts out with an "equivalent stock
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position" (ESP) of 0. Another term for ESP is "position delta." Thus, in theory,
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there is no price risk to begin with; the position is neutral with respect to price
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movement of the underlying. That definition lasts for about a nanosecond.
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As soon as time passes, or the stock moves, or implied volatility changes, the
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deltas change and therefore the position is no longer delta-neutral. Many people
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seem to have the feeling that a delta-neutral position is somehow one in which it is
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easy to make money without predicting the price direction of the underlying. That is
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not true.
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Delta-neutral trading is not "easy": Either (1) one assumes some price risk as
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soon as the stock begins to move, or (2) one keeps constantly adjusting his deltas to
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keep them neutral. Method 2 is not feasible for public traders because of commis
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sions. It is even difficult for market-makers, who pay no commissions. Most public
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practitioners of delta-neutral trading establish a neutral position, but then refrain
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from adjusting it too often.
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A common mistake that novice traders make with delta-neutral trading is to
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short options in a neutral manner, figuring that they have little exposure to price
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change because the position is delta-neutral. However, a sizeable move by the under
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lying (which often happens in a short period of time) ruins the neutrality of the posi
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tion and inevitably costs the trader a lot of money. A simple example: If one sells a
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naked straddle (i.e., he sells a naked put and a naked call with both having the same
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striking price) with the stock initially just below the strike price, that's a delta-ne~tral |