Many people try to take a directional assumption on their trades. But many have found that keeping their portfolio delta-neutral, meaning that they have a balance between long and short delta, is an easy way to benefit no matter what the market does and to bet on volatility rather than price movement. But what benefits does delta-neutrality have over just taking a directional assumption, and what strategies can help you to do this?
02:26 – Week in Review
- Index moves this week:
- S&P 500: -0.5%
- Dow: -0.9%
- NASDAQ: -1.3%
- VIX: +0.5%
- Stimulus has still been the major topic in the news this week.
- How will the election affect the market?
- This week, a quarter of the companies in the S&P reported earnings.
- With the uncertainty around the election, it’s a perfect time to reduce risk.
- Initial jobless claims: 787K V 870KE
- There have been spikes of the coronavirus in Europe.
14:58 – The Benefits of a Delta-Neutral Portfolio
- This concept has revolutionized the way I trade options.
- Delta is an option greek that determines how far the option’s price will move as the underlying stock moves.
- A positive delta means the option increases as the stock increases, while a negative delta means the option decreases as the stock increases.
- When you keep your overall delta neutral (at approximately 0), you can benefit no matter how the market moves.
- You can also use delta-neutral strategies, such as iron condors and short strangles.
- The benefit of being option sellers is that we don’t have to bet on the direction of the market.
- Bet on volatility, not stock price movement.
- It’s impossible to predict how the market will move.
- It’s a numbers game: the more trades you make, the more successful you will be.
- The importance of managing your trades before expiration.
- Even very far OTM puts can have a high premium.
- It’s always important to trade small.
- Even a two standard deviation strangle can give you a good return with low risk.
- ETFs can be less volatile than individual stocks.
- What is beta-weighted delta and should you use it?
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