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:
- 2005 – 2017
- 1 Strangles
- 45 DTE
- Recorded Put and Call when Position Gets Tested
As expected, when the position gets tested, the tested side has a delta close to 50.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.