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Below is today's release from Hubert Lee, the option fool. He offers a free trial on his
site @
http://optionfool.com/optfool/welcome.html
JW
abprosys@xxxxxxx
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> From: Hubert Lee <optfool@xxxxxxxxxxxxxx>
> To: optionfools@xxxxxxxxxxxxxx
> Subject: Staying Delta Neutral- ha, ha
> Date: Thursday, August 21, 1997 8:11 AM
>
>
> Topic: Staying Delta Neutral
>
> Dear Option Fool:
>
> I am trying to setup a trading strategy where I buy a
> neutral position at a support level. I want this position to
> accumulate losses and gains equally so that once
> established, the position would match gains on the long
> side to losses on the short side and visa-versa.
>
> To get this position, would I have to match deltas? If so,
> does the position need to be readjusted periodically to
> maintain it's neutrality? if so how often?
>
> Stop Me Before I Shoot Myself In The Foot
>
> Dear But Your Broker Would Hate Me If I Did:
>
> First I'll give you the same answer as your broker would:
> "Yes, to keep your position hedged, you must trade early
> and often. As a matter of fact, the second you execute
> your adjustment trade, your delta has slipped out of
> neutrality already and you better take more action.
> Besides, I could use the constant commission stream, the
> boat show is coming up."
>
> For those needing a review, delta is a measure of the rate
> of change in the option premium as seen against the
> change in the underlying stock. To be delta-neutral is to
> have hedged away the influence of changes in the
> underlying issue, thus isolating the other components of
> an option's price.
>
> Here is my own personal approach to option strategies.
> Ask yourself what aspect of the situation you want to play
> and then find the simplest approach. In your case, why
> are you looking to hedge this way? Are you interested in
> selling time decay and want to hedge off the price
> movement? Or are you trying to target volatility as a
> factor? What is the simplest way? Is there stock
> involved as well, or is this a pure options play? Each of
> the components of the theoretical valuation models can
> be isolated and played through an option strategy.
> Which one you focus on depends on who you are.
>
> Institutions and professionals (floor brokers, specialists,
> etc.) have the resources to make constant portfolio
> adjustments. Thus are willing and able to concentrate on
> "high maintenance" strategies that need plenty of
> tweaking to stay balanced (such as your "delta-neutral"
> idea). This process is certainly easier for the floor trader
> than an individual investor. They have a constant inflow
> of orders that they can scrutinize and either incorporate
> into their positioning or pass through as a hedge. Sure,
> there is plenty to keep track of, but the fact of being right
> there gives them plenty to choose from. Plus, they pay
> very low commissions.
>
> The main disadvantage to the individual Option Fool is
> mainly the matter of commissions. The floor trader
> hardly pays anything in comparison. Thus, they can
> engage in all sorts of complicated scenarios that the
> private trader cannot (that includes most delta-neutral
> type setups). This is why I always argue for the
> simplest approach.
>
> Look at it this way: You read about a 4-leg, mumbo-
> jumbo-theta-vega-gamma sandwich spread in a 1,000
> page text. It sounds impressive (and besides, you spent
> $69 for the book and feel you ought to try something
> from it), so you look into it. Well, it seems that if the
> market stays where it is, or goes up, you'll be OK. That
> is, you'll make a percent or two. If the market really
> takes off, you may even cover your commissions. And
> the real kicker is - when you explain the strategy to
> your neighbor and he asks why don't you just buy the
> stock, you are stuck for an answer!
>
> Not to be wise, but yes, to keep delta neutral, one must
> re-evaluate and adjust constantly. Also, keep in mind
> that all the tweaking in the word will NOT help you with
> huge gap changes. As a matter of fact, that is what the
> pros fear most. Many a takeover announcement has
> permanently whacked out the hotshot trader when it gaps
> past the protection of the hedge.
>
> Try to keep it simple. Calculate the probable gains,
> subtract the commissions and compare to the net gain to
> be had from the most ridiculously simple example you
> can think of (i.e. straight buy of puts or calls). Compare
> worst case scenarios as well. Don't forget that Murphy's
> Law was written by an unhappy options trader (I made
> that up). Also, never rule out simply buying common
> shares of stock, either.
>
> Good Luck! Hubert Lee, The Option Fool
>
> ____
>
> A loose-leaf compilation of previous Dear Option Fool letters
> is available directly from the author. Use the three ring
> binder to house future e-mails.
>
> Send $28 ($25 plus $3 priority mail postage) to
>
> Hubert Lee
> POB 158
> Stony Brook, NY 11790
>
> As always, there is a money back guarantee. Just send it back
> for a full refund if you don't like it.
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