Jeff Kohler the Option Addict | Stock and Options Trading

We have talked a few times about taking a pure non-directional trade, or being delta neutral on a position. Since Deltas are constantly changing this is not always feasible, but some will say you at least want to be "Delta Comfortable." This means you select a delta on a position that you are comfortable with (low, high, positive or negative). Many professional traders will balance their positions be be no delta to perhaps slightly negative. Meaning that the price can move which ever direction you want, and it will have little to no effect on your trades. I have included a graphic that shows an option chain on Google and a specific example of creating a strangle with a neutral Delta...

If I choose to purchase the GOOG Nov 420 Call, and Buy the GOOG Nov420 Put this creates a straddle. Notice the values of each options delta. The delta of the call is .51, and the delta of the put is -.51. This would mean the two values cancel each other out and equal zero. Any gain in the call would be equally offset by the loss in the put, and any gain in the put would be equally offset by loss in the call. If I were expecting a rise or fall in volatility, I might purchase or sell this straddle to profit from it.

My intention here was to show a specific example of how this works. You can also create this scenario by multi-leg option trades. Make sure you are compounding all your deltas until they equal or get close to zero. This will help you eliminate price as a factor and focus strictly on volatility.

Posted by Option Addict on 9/18/2006 at 12:02 PM | Permalink