DEMO TRADE: CONTINUOUSLY DELTA HEDGED PREMIUM SELLING
Updated
Pictured here is a delta neutral ratio'd short strangle set up in the September '20 expiry. It pays 8.60 ($860) and has delta/theta metrics of 1.01/4.12, and extrinsic currently equal to the premium received of 8.60.
The purpose of this demo is to show how continuous delta hedging might work in practice on a premium selling setup. The goal is to bring the setup back to delta neutral at intervals in order for theta to be allowed to do its work while simultaneously maintaining extrinsic in excess of scratch point and to ultimately exit the entire spaghetti-works in profit.
In this particular case, a short option hedge will be applied at intervals, assuming the adjustment involves a short option of sufficient value to make it "worthwhile" (i.e., it won't make much sense to sell a 1 delta option in order to get the setup back to flat if that option is only paying, .05, for example).
Although profitable sides will be frequently taken off to balance in practice, here I will just be adding for purposes of simplicity.
The purpose of this demo is to show how continuous delta hedging might work in practice on a premium selling setup. The goal is to bring the setup back to delta neutral at intervals in order for theta to be allowed to do its work while simultaneously maintaining extrinsic in excess of scratch point and to ultimately exit the entire spaghetti-works in profit.
In this particular case, a short option hedge will be applied at intervals, assuming the adjustment involves a short option of sufficient value to make it "worthwhile" (i.e., it won't make much sense to sell a 1 delta option in order to get the setup back to flat if that option is only paying, .05, for example).
Although profitable sides will be frequently taken off to balance in practice, here I will just be adding for purposes of simplicity.
Trade active
Current delta at .07, so no need to do any adjustment this week -- unless you want to sell a 2 delta call, which naturally won't be that productive from a credit collection standpoint (i.e., the September 18th 2 delta 400 is paying .17).Note
Naturally, if you want to build extrinsic/theta over time while simultaneously delta balancing, you can sell a skewed short strangle to balance back to flat. As of Wednesday close, the setup was -1.36 delta, so you could sell the 265/350 16/15 delta to pick up 1.4 positive delta while collecting an additional 8.17 in extrinsic and bumping up your theta to 7.84.Trade active
The setup has moved about 6 delta long, so selling the 6 delta 365 short call for .73. Scratch at 9.33; delta .02/theta 5.04.Trade active
Net delta is -7.51. I can (a) sell an 8 delta put; (b) sell a slightly skewed short strangle (e.g., a 19 delta put/16 delta call (under hedge); or (c) do nothing, leaving it slightly short delta at all-time-highs. Just for kicks: selling the 260/355 slightly skewed short strangle to pick up 3.57 long delta and an additional 6.92 in credit. Scratch at 16.25.Trade closed manually
The whole she-bang is currently valued at 14.75 after a month or so; covering for a 1.50 ($150) profit.
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