We like to sell options when implied volatility (IV) and implied volatility rank (IVR) are high. Straddles and Strangles are two of our favorite strategies to do this, but these strategies can be overwhelmed by some of the Greek risks. This is especially true with delta. Is there a way to hedge this risk?
Our research team conducted a study in SPY (S&P 500 ETF) from 2005 to present. Using options closest to 45 days to expiration (DTE) we sold the at-the-money (ATM) Straddle in the beginning of each month. If the delta had grown over a positive or negative 10 delta we hedged the straddle at the end of each trading day, if not the position was left alone. We closed the straddle and stock position at expiration. This was compared to a standard short straddle held to expiration.
A table of the results comparing a short straddle to a dynamically hedged short straddle was displayed. The table compared the average P/L, Standard Deviation of the trade P/L, percentage of profitable trades, largest profit and largest loss. An 11 year graph comparing a passive long SPY position to a Dynamic SPY rebalance was also displayed.
For more on Delta and hedging see:
Options Jive from February 16th, 2016 “Option Risks | Direction (Delta)”
Best Practices from April 18th, 2016: “Eliminating Direction | Delta as a Hedging Tool”
For more on how Gamma impacts a Delta hedged position see:
Watch this segment of “Market Measures” with Tom Sosnoff, Tony Battista and Chris Butler from the research team for the important takeaways and the results of our study comparing ordinary straddles and ones that were dynamically hedged.
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