Delta changes as price moves. But if you buy/sell more stock as it does, then yes. That’s delta hedging using the underlying
Jetstream89 on
Yes, if you would buy 50 shares, sell a .5 delta call and nothing changes you would be left with the extrensic value of the option but if the price moves a little the gamma comes into effect so than you would have to buy more shares to remain delta neutral. Also, the closer you come to experation the higher the gamma so one move the day before experation could have you buy more stocks than lets say a increase in price 4 weeks out.
There is a whole book about this and these sort of strategies its called: Option Pricing and Volatility
wittgensteins-boat on
The worst is you stock crashes down 25%
bluewaterfree on
Maybe I’m missing something.
If you buy 50 shares and a sell a 0.50 Delta call….
If the stock sky rockets, your call will be exercised for 100 shares. Your 50 shares will be assigned and you’ll still owe 50 shares of value. The premium collected ain’t going to cover that.
So you aren’t proposing a covered call at 0.50 delta…. you’re only 50% covered and 50% uncovered on a short call.
Your worst case is having to buy 50 more shares at the market price when assigned minus the premium collected. That could be a big loss.
CymroBachUSA on
1 stock option = 100 shares. You can’t sell half an option.
CyJackX on
This will perform similarly to a short straddle.
Your delta is hedged to 0, and you get theta. Big movement either way is likely to be a loss.
6 Comments
Delta changes as price moves. But if you buy/sell more stock as it does, then yes. That’s delta hedging using the underlying
Yes, if you would buy 50 shares, sell a .5 delta call and nothing changes you would be left with the extrensic value of the option but if the price moves a little the gamma comes into effect so than you would have to buy more shares to remain delta neutral. Also, the closer you come to experation the higher the gamma so one move the day before experation could have you buy more stocks than lets say a increase in price 4 weeks out.
There is a whole book about this and these sort of strategies its called: Option Pricing and Volatility
The worst is you stock crashes down 25%
Maybe I’m missing something.
If you buy 50 shares and a sell a 0.50 Delta call….
If the stock sky rockets, your call will be exercised for 100 shares. Your 50 shares will be assigned and you’ll still owe 50 shares of value. The premium collected ain’t going to cover that.
So you aren’t proposing a covered call at 0.50 delta…. you’re only 50% covered and 50% uncovered on a short call.
Your worst case is having to buy 50 more shares at the market price when assigned minus the premium collected. That could be a big loss.
1 stock option = 100 shares. You can’t sell half an option.
This will perform similarly to a short straddle.
Your delta is hedged to 0, and you get theta. Big movement either way is likely to be a loss.