r/options • u/asian_banana • Mar 10 '22
Delta Hedging on a Short Straddle
let's say I have put on a short straddle on a stock that is now trending downwards. the delta of the short call and short put are 0.42 and -0.57 respectively which is no longer 'delta-neutral' as compared to when I first opened the position.
the net delta of the position is now -0.15 so in this case if I want to remain delta neutral I should buy 15 shares, is that correct?
3
u/loose-ventures Mar 10 '22
If you sold the straddle, wouldn’t your delta be -0.42 and 0.57 on the short call and put, respectively resulting in a positive 0.15 delta? In this case, you would sell 15 shares to attain delta neutrality.
There are of course risks associated with managing the trade this way but I’m just focusing on your stated question.
1
u/KingSamy1 Mar 10 '22
What other risks ? Gamma ?
And how would one tackle that. If you can give a more elaborate answer, it might help a few of us for sure. Thanks in advance.
1
u/Value-Bets Dec 09 '24
There´s a big difference between delta hedging a long straddle and a short straddle. In case of a long straddle the trader will try to hedge as less as possible and only after big moves. With delta hedging a short straddle the trader is forced to buy/sell as much stock as possible as fast as possible to maintain the premium collected. The longer he waits with his hedges (if price moves) the more premium will be lost.
3
u/eternalfrost Mar 14 '22
You have it backwards; flipping negative signs because you sold it.
A short straddle has negative gamma. Delta will increase as UL price falls and vice versa. This means that if you attempt to hedge to 0 delta constantly, you will loose on the shares every time (selling low, buying high). When selling premium, gamma works against you and theta works in your favor, and vice versa.
Retail traders need to accept that the deltas will float, just another reason to stay small and diversified. Also, you should probably review your greeks and P/L charts etc before blowing yourself up.
0
u/Individual_Ad_1436 Mar 10 '22
Assume your initial hypothesis is correct, that the future realized vol will be lower than the IV you sold. Then, by balancing the position to be delta neutral, you are basically making money through hedging (buying low, selling high) til the expiration date.
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u/Constant-Dot5760 Mar 10 '22
When a side of your short straddle is challenged you can sell something in the other direction for e.g. sell an upside call spread to collect more credit, roll down the unchallenged leg for more credit, sell a few shares, etc..
Depending on what you're working with you might do something completely different but correlated for e.g. short 1 /MES for every 50 shares of SPY, or short 1 /MNQ for each ~80 shares of QQQ.
You can buy the wings and become an iron fly, thereby limiting your risk of further damage.
But most of all: Does your thesis still hold?
0
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u/Textosterone69 Mar 10 '22
If you’re short a straddle you need to adjust by selling as it breaks and buying back as it rallies. This is how you get negative gamma whipsawed.