Market Measures

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Delta Rebalance - Volatility Control

Market Measures

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When trading delta neutral, it’s important to keep directional risk under control. If the deltas of a neutral strangle reach +- 1, the position is synthetically long/short 100 shares of the underlying. This implies greater directional risk. Rolling when a leg becomes breached is a mechanical strategy which prevents the position from taking on too much directional risk.

The Study: Results:

As expected, when the position gets tested, the tested side has a delta close to 50. Rolling the position when the strike is touched helps reduce the delta risk which exhibited better portfolio performance and lower portfolio volatility when compared to holding to expiration.

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