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With Pleasure:
Assume you think Crude will not stay at 30.00 / barrel for whatever reason
- This is the hard bit to find unstable levels.
An at the money option has a delta of .50 which roughly means the following
amongst other things:
1) it has a 50% chance of expiring in the money.
2) this delta changes according to the value of the underlying by a factor
gamma
A future always has a delta of 1
Therefore if you buy a hundred 30.00 calls your total delta is 50.
This is equivalent of 50 futures.
Therefore sell 50 futures at 30.00 and your net delta is 0
PRICE RALLIES
if the price rallies to 31.00 the delta increases to say 60 (higher chance
of expiring the money)on the 100 calls and the futures stay at 50. Your net
delta is now +10 or the equivalent of being long 10 futures.
PRICE FALLS
if the price falls to 29.00 your delta will fall to about 40, the futures
stays the same giving you a net delta of -10 or the equivalent of short ten
futures.
you can either close the whole position out or of the price falls for
example buy back 10 futures when the option position delta = 40 to
re-establish delta neutrality. Simply carry on.
If the price moves nowhere close the whole position, losing only the time
decay on the options and commission.
The two things that are hard are:
finding a good indicator / pattern etc to give you the highest chance of
the market moving - have something after a few years work that works very
well.
deciding when to exit the trade - Have no idea about this and need to work
on some sort of consistent exit system.
hope this is useful, although brief,
Regards
Mark
Could you post a sample real trade that demonstrates the concept? It would
help understand what looks promising for conservative return.
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