Using OTM options to cut NET delta

IncomeLab Forum Forums Income Lab Using OTM options to cut NET delta

This topic contains 7 replies, has 2 voices, and was last updated by  Igor 2 years, 1 month ago.

Viewing 8 posts - 1 through 8 (of 8 total)
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  • #7980

    Igor
    Keymaster

    #7978

    Igor
    Keymaster

    Igor
    – I have been following all your trades over the last 7 months backtesting in an options platform at an assumed maximum risk level per trade.

    – First – can I congratulate you on an excellent profit performance. I am very surprised Steve doesn’t publish your financial performance on the IWO site – it kills a lot of other sites that I have checked out!

    – Secondly – a question on Delta hedges such as the ones used on this trade as well as the SPX 06JAN17 Iron Condor placed on 15Nov16:
    – Could you help me with some clear guidelines on the rules that you use to determine the size and strike level of the hedges that you use?
    – I have been a bit confused as you often mention the size of the hedge – but not the size of the initial trade. I have gone through the Iron Condor Intensive course – but I am still not clear.
    – A bit of stress testing points to the fact that the size of the hedge is key in determining whether the whole trade ends up in a profit or loss. Based on size it can be substantial either way.

    – Please keep up the good work – I have gained a lot by following you closely.

    – Many thanks

    #7979

    Igor
    Keymaster

    Graham, thanks for your feedback. In this video, I went over the basics of using OTM options as a hedge:

    #7981

    Igor
    Keymaster

    Igor – much appreciated – it was great – a nice easy to follow video – on an adjustment system with nice clear rules.

    A question on detail:

    – If say you have too much negative Delta – and you want to add say 30 Delta to your position – as per your adjustment system you would go and purchase OTM Calls with Deltas adding up to 30 – ie 3 x 10 or 2 x 15.

    – However – the shape of the Risk Curve of a Call changes – based on how far OTM the Call is.

    – With Price change in the Underlying – a Call at OTM 10 will behave differently to a Call at 15 OTM.

    – Do you have any approach or guidelines that would address this issue?

    – Many thanks

    #7982

    Igor
    Keymaster

    To remove excess delta I will go out to options that have around 45 days to expiration and use OTM options to achieve that. I like using options that have delta between 15-8 because options that are closer to ATM (40-30 delta) don’t have as much gamma and don’t lift the curve as much as I’d like on the upside, and options that are very far OTM (less than 5 delta) don’t gain as much value as the pricing model suggests and therefore don’t cover the cost of a roll.

    #7991

    Igor
    Keymaster

    Igor
    – An EXCELLENT response – sound and logical.
    – I checked this out on my option software – it’s a really good approach.
    – Many thanks
    – I will keep following you with great interest.

    #7992

    Igor
    Keymaster

    I’m really glad you’re following the process and learning at the same time. I hope everyone else is doing the same and I encourage everyone to ask questions because my goal is to help traders become profitable and consistent with their trading.

    #7993

    Igor
    Keymaster

    – Just what I needed!

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