44 lines
1.5 KiB
Plaintext
44 lines
1.5 KiB
Plaintext
Chapter 37: How Volatility Affects Popular Strategies
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EFFECTS ON NEUTRALITY
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755
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A popular concept that uses delta is the "delta-neutral" spread a spread whose prof
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itability is supposedly ambivalent to market movement, at least for short time frames
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and limited stock price changes. Anything that significantly affects the delta of an
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option can affect this neutrality, thus causing a delta-neutral position to become
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unbalanced ( or, more likely, causing one's intuition to be wrong regarding what con
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stitutes a delta-neutral spread in the first place).
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Let's use a familiar strategy, the straddle purchase, as an example. Simplistically,
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when one buys a straddle, he merely buys a put and a call with the same terms and
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doesn't get any fancier than that. However, it may be the case that, due to the deltas
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of the options involved, that approach is biased to the upside, and a neutral straddle
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position should be established instead.
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Example: Suppose that XYZ is trading at 100, that the options have an implied
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volatility of 40%, and that one is considering buying a six-month straddle with a strik
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ing price of 100. The following data summarize the situation, including the option
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prices and the deltas:
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XYZ Common: l 00; Implied Volatility: 40%
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Option
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XYZ October l 00 call
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XYZ October l 00 put
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FIGURE 37-2.
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Price
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12.00
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10.00
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Delta
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0.60
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-0.40
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Value of delta of a 6-month option at differing implied volatilities.
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90
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80
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70
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.!!l
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ai 60
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Cl
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C: 50 ,g
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8° 40
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30
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20
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10
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60 80 100
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Stock Price
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120 140 |