I have been trading a delta neutral options only position on a particular stock that is quite volatile for the past several months and have pretty decent results. The problem I am running into is figuring out a consistent point at which to balance the stock.
I read that one convention is to balance the trade when the delta exceeds an absolute value of 1 (or 100 deltas). Given the volatility of this stock I have been using a value of 1.5. A typical day returns a profit of .4% (excluding outliers which are biased significantly upwards). However, some days I will turn a profit that is closer to 20%.
I also read that it is sometimes normal to wait for a 20% change in the underlying asset which seems somewhat liberal to me.
Just wanted to know if anyone knew of any conventions or has used a method themselves that has worked. I am not particularly unhappy with my strategy but sometimes I feel that it is too conservative; yes, it limits losses, gets small gains, and keeps me in the game for big moves, but any protracted (really anything greater than a 1 day move) occurs for me at delta neutral rather than a trend biased position.
I should note that typically I do not like to hold stocks less than 4 weeks out of expiration but given the wild swings in this stock I have not had any problems waiting until 2 weeks before expiration.
Any ideas would be greatly appreciated!!
Thanks and good trading.
I should clarify a few things:
1) When I refer to the absolute value of the total delta exceeding 1 I am referring to the difference between the two deltas
2) I typically use ITM options; however, it is not always technically a straddle b/c I have not always been using the same strike prices for various reasons (e.g. easier adjustment back to neutral).
