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Delta Neutral: Is it Essential or a Choice?

Mark,

A method I've seen to adjust deltas is to simply balance your position with
calls and puts. For example, I am bullish on AAPL and buy 5 calls; but
to neutralize delta, I also buy 2 puts. Is this position more
advantageous than simply buying 3 calls and no puts?

Andy

***

a) If you are bullish on a stock, why are you thinking abut buying puts?

b) If you are bullish on a stock, why do you want to neutralize delta?

c)
If owning 5 calls is too many and makes you a bit uncomfortable, then
buy only 3 calls.  Do not defeat your plan by owning 2 extra straddles.

Here's
my problem: What is behind this question?  Why do you ask?  If you
believe that buying those 2 extra puts makes your position better or
'safer' because it is nearer to delta neutral then you don't quite
understand the idea behind delta.

Buying
two straddles is expensive and takes a fairly large move to earn a
profit.  Buying those two straddles decreases the likelihood that you
will earn a profit.  Yes, it gives you a better result if AAPL makes an
extremely large move in either direction, but that is not what you
anticipate, so why pay so much cash to own 2 straddles?

If
the answer is to be 'delta neutral' then you are missing a key point. 
There is nothing magical about delta neutral.  The Greeks are used to
measure risk.  That is all they do.  They allow you to measure risk. 
When you quantify the risk, you can decide whether to take steps to
reduce that risk.  You do not have to be delta neutral. 

It is one way
to reduce risk – but it's your choice.  Delta tells you how much you
can expect to gain or lose when the stock moves one point.  If that
number doesn't work for you because it's too large, that's the time to
adjust; that's the time to make the position closer to being neutral in delta, or any other
Greek.  But it's not mandatory to be Greek neutral.

In
AAPL, buying 2 puts when bullish is just throwing away money to reach
some nirvana called 'delta neutral.'  Forget that nonsense.  If you are
bullish buy the three (or five) calls and forget the puts.


However

If your plan is to trade a 'market neutral' strategy such as an iron condor, then owning a position that is near Greek neutral makes more sense.  When you have no market bias, when you are not wagering on a specific outcome (e.g., AAPL stock moving higher), then being neutral is a good choice.

Delta neutral is good for certain purposes.  Don't latch onto that phrase and decide that all positions should be delta neutral.  After all, people who buy stocks don't diminish their hoped for returns by hedging.  The majority remain naked long their stocks.  It's okay to do the same – when appropriate.

628


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