Many portfolio managers will seek Delta-neutral portfolios to mitigate directional or market risk. This article will explain how these experts calculate their positions to achieve this goal. To simplify the details, a single security will be used but the concepts apply to total portfolio positions as well.
- Delta: The amount an option value will change for every $1.00 change in the price of the underlying security
- Gamma: The amount Delta will change for every $1.00 change in the price of the underlying security
- Delta-neutral: The sum of all put, call and stock Deltas are equal to or near zero
Delta ranges per-share
- Long stock: Always (+1)
- Short stock: Always (-1)
- Long calls: (0 to+1)
- Short calls: (0 to -1)
- Long puts: (0 to -1)
- Short puts: (0 to +1)
- For contracts multiply by 100
Use a combination of long and short calls and puts and stocks to create a portfolio with a net Delta position near zero.
***Gamma will be constantly changing Deltas. This concept is beyond the scope and goals of this article.
INMD ($71.15) call Delta for the OTM $72.50 strike
INMD ($71.15) put Delta for the OTM $67.50 strike
Delta-neutral calculations with options only
- We first establish a ratio of call Delta to put Delta: 0.47/0.31 = 1.5
- We will buy 1.5 times more puts than calls to reach a Delta-neutral position
- 4 calls = 4 x 0.47 = Delta of 1.88 x 100 = 188
- 6 puts = 6 x (-) 0.31 = Delta of – 1.86 x 100 = -186
- Net Delta position = +0.02 x 100 = +2 or near zero
Delta-neutral calculations with stock and options
- Buy 2 calls = +0.94 x 100 = 94
- Buy 4 puts = -.1.24 x 100 = -124
- Buy 30 shares = +1 x 30 = +30
- Net Delta position = 0 or a true Delta-neutral position
Although the concept of Delta-neutral portfolios generally does not apply to retail investors, there are times, during market turmoil, when we may look to achieve positions that are directionally protected. This article’s goal was to offer a methodology commonly used by professionals to manage these scenarios.
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Tuned in yesterday for the put option presentation. Very good workshop. Thanks!
Last month, I sold a couple of put options. I was ready to buy Mattel at $20, but instead opted to sell a put at a $20 strike. It expired worthless. I kept the premium and tuned into your workshop this week. All good here!
1.Mad Hedge Summit: Free Zoom presentation
Tuesday March 15th at 11 AM ET
Selling Cash-Secured Puts: 4 Practical Applications
Selling cash-secured puts is a low-risk option-selling strategy which generates weekly or monthly cash-flow. This presentation will detail how to craft the strategy to multiple applications which will align with various goals and personal risk-tolerances. Topics included in the webinar include:
- Option basics
- The 3-required skills
- 4-practical applications
- Traditional put-selling
- PCP (Put-Call-Put or wheel) Strategy
- Buy a stock at a discount instead of setting a limit order
- Ultra-low-risk put/Delta strategy
Real-life examples along with rules, guidelines and calculations are included in this presentation.
2. Wealth365 Summit: Free Zoom presentation
Thursday April 7, 2022
11 AM – 12 PM ET
An Ultra-Low-Risk Approach to Selling Cash-Secured Puts
Entering and Managing 10-Delta Trades
Selling cash-secured puts is a low-risk option-selling strategy seeking
to generate cash-flow with capital preservation in mind. This
presentation will highlight an ultra-low-risk path to option-selling
using Delta stats as a basis for the methodology. A new one-of-a-kind
trade management tool will also be introduced that will assist in
entering managing and receiving final trade results from start-to-
finish for both covered call writing and selling cash-secured puts.
Topics detailed in the course:
- Option basics
- Hypothetical and real-life traditional cash-secured put trades
- Pros & cons of selling cash-secured puts
- The 3-required skills for elite option-selling results
- Delta defined and implemented
- Real-life monthly cash-secured put trade with 6 income streams
- BCI Trade Management System (first-ever such tool)
3.Long Island Stock Investors Meetup Group
Stock Options: How to Use Implied Volatility to Determine Strike Selection
Creating 84% probability successful trades for covered call writing and selling cash-secured puts
Wednesday April 13, 2022
7:30 PM ET – 9:30 PM ET
4. LIVE at The Money Show Las Vegas
May 10th – 11th
Registration link to follow.
Portfolio Overwriting (free)
Tuesday May 10th at 1:30 PM – 2:15 PM
Increasing Profits in Our Buy-And-Hold Portfolios Using Covered Call Writing
A Comprehensive Analysis of Covered Call Writing: 2-hour Masters Class (paid event to The Money Show)
Wednesday May 11th at 1:30 PM – 3:30 PM
How to master all aspects of this low-risk option-selling strategy
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 03/11/22.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
Barry and The Blue Collar Investor Team
Do you think this is a good time to start using inverse etfs in our portfolios? At least until things calm down in Ukraine?
Inverse ETFs should be implemented in bear market conditions that are anticipated to last for more than a few weeks. Will Ukraine, inflation and interest rate hikes create that scenario? The market is down nearly 12% year-to-date so, looking back, yes. However, looking forward, we can’t be sure.
This week, we have the Producer Price Index Report and FOMC announcement, both of which can impact the market significantly. How long will the Ukraine tragedy continue?
This week, I will do my analysis and make decisions regarding the construction of my portfolios for the April contracts over the weekend and inverse ETFs may or may not be part of that plan.
Alan, with 3 days left to contract expiration, do you find that there are any exit strategies available besides rolling out?
Certain exit strategies are most appropriate early in a monthly contract (“hitting a double”) and others, later in a contract (rolling-down), but we must be prepared to take advantage of all exit strategy opportunities at all times. Here is such an example:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
For your convenience, here is the link to login to the premium site:
NOT A PREMIUM MEMBER? Check out this link:
Alan and the BCI team
The Blue Chip (Dow 30) Report has been uploaded to your member site on the right side (resources/downloads”). Scroll down to “B”
There are 8 stocks that have outperformed the S&P 500 in both 1- and 3-month time frames and are positive in both periods despite the overall market in negative territory.
Interesting action on 3/16/22. It was a partial fill on 1 of 20 contracts on a 10% BTC. Things happen.
I had 20 contracts on Fidelity and 20 contracts on Etrade with a 10% BTC 20CN 21.5 Call Exp 3/18 @ $0.05 on 4000 ICLN shares Pur Price at 20.78 (Ishares Global Clean Energy ETF).
10% BTC Fill:
Was surprised today 3/17 that I discovered that 1 CN filled at $0.05 on Wednesday 3/16. My original premium on the 20 contracts was at 0.33 after commission. Had to place the BTC at the next $0.05 increment.
I have cancelled the remaining BTC of 19 contracts at Etrade and the 20 contracts at Fidelity.
That leaves me with 100 shares (Pur price 20.78) in a long position for Expiration Friday 3/18 and 1900 shares in a covered call position at Etrade.
I will be looking for a HIT the Double on those100 shares tomorrow on the 21.5 call. I will place an order STO 1CN 20.5Calll 3/18 at 0.20. Then adjust later during open hours to hit a double on the last day. The 0.05 Buy to close reduced my ROO% by 0.23 (.05/20.78). At a BTC of 0.20 the return is 0.96% or 0.73% net increase.
Method 1: Manually or using calculator:
Looking at 100 shares, I originally bought 100 shares at $20.78 with a STO 1CN 21.5Call Exp3/18 at 0.33. ROO% = 1.59% (0.33/20.78), Including upside of 3.46% (21.5/20.78) to strike at 21.5, ROO Total is 5.06%. The Buy to Close reduces it by 0.24% (.05 / 20.78) or net ROO% of 4.82% for the 100 shares.
Method 2: Using Breakeven Point method to calculate ROO%
Return Cost Basis 20.78
Breakeven point is 20.78 – 0.33 =20.45
ROO at 20.78 at Entry Price= (20.78 – 20.45)/20.78 = 1.59%
ROO at Strike of 21.5 = (21.5-20.45)/20.78 = 5.05%
It is good to hear from you. I may have missed any posts you have done but I don’t remember seeing any for a long time.
I hope all is well with you and yours.
I have experienced partial fills infrequently but when they occur, it is typically in volatile market conditions. It appears on Wednesday that ICLN moved from approximately $20.15 to $20.85.
A 5% (1-month?) return is wonderful. Congratulations.
Here is a link to a related article I published:
Here’s another based on one of your previous trades:
Thanks for sharing.