Comment on Application of Option Greeks

Karthik Rangappa commented on 20 Aug 2014, 03:06 PM


A straddle will be delta neutral as long as you initiate the position using ATM option. In the example you’ve quoted the position will not be delta neutral..since 7800CE is OTM, assume a delta of -0.4, and 7800PE is ITM, assume a delta of +0.7. Note, the algebraic sign indicates a short (+ve for Put, and -ve for Calls).

So the total delta adds to -0.4+0.7 = 0.3. Therefore in this position you are exposed to both directional, and volatility risk.

To negate the direction risk, you will have to ensure the delta becomes zero, and stays zero. There are many ways to do this, for example you can consider adding 2 short calls, and 1 short PE..that would make -(2*0.4) +0.7 = – 0.1…closest approximation 🙂

After making this adjustment, the position becomes delta neutral, and the direction no longer matters. As long as your call is right on Vega, you will surely make some profits.

Good luck.

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