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Case & Hedging Examples. Delta – Neutral. Consider our strategy of a long Straddle: A long Put and a long Call, both at the same exercise price. What we are interested in is the Stock price movement, either way, and with symmetric returns. Case: Pine Street Capital.

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delta neutral
Delta – Neutral
  • Consider our strategy of a long Straddle:
    • A long Put and a long Call, both at the same exercise price.
  • What we are interested in is the Stock price movement, either way, and with symmetric returns.
case pine street capital
Case: Pine Street Capital
  • Hedge Fund (HF) vs Mutual Fund (MF)
  • “Market-Neutral”/Positive-Alpha
  • “Market-Neutral” as a Simple Hedge:
    • Short the “Market”
    • Put the “Market”
straddle example
Straddle Example
  • Intel at $20, with riskless rate at 3% and time to maturity of 3 months. Volatility for Intel is 35%.
  • Calls (w/ X=20) at $1.47
  • Puts (w/ X=20) at $1.32
straddle example5
Straddle Example
  • Buy 10 calls and 10 puts
    • Cost = (10 * $1.47 * 100) + (10 * $1.32 * 100)
    • Cost = 2790
straddle example6
Straddle Example
  • Intel  $22, C = $2.78, P = $0.63
    • Value = (10 * 2.78 * 100) + (10 * .63 * 100)
    • Value = $3410
    • Gain = $620
  • Intel  $18, C = $0.59, P = $2.45
    • Value = (10 * 0.59 * 100) + (10 * 2.45 * 100)
    • Value = $3040
    • Gain = $250
  • More Gain to upside so actually BULLISH!
delta neutral7
Delta - Neutral
  • Delta of Call is 0.5519
  • Delta of Put is -0.4481
  • Note: Position Delta =

(10*100*.5519) + (10*100* -0.4481) = +103.72  BULLISH!

  • Delta Ratio is:

0.4481 / 0.5519 = 0.812

which means we will need .812 calls to each put (or 8 calls and 10 puts).

delta neutral straddle example
Delta - NeutralStraddle Example
  • Buy 8 calls and 10 puts
    • Cost = (8 * $1.47 * 100) + (10 * $1.32 * 100)
    • Cost = 2496

Note: Position Delta =

(8*100*.5519) + (10*100* -0.4481) = -6.65  Roughly Neutral

delta neutral straddle example9
Delta - NeutralStraddle Example
  • Intel  $22, C = $2.78, P = $0.63
    • Value = (8 * 2.78 * 100) + (10 * .63 * 100)
    • Value = $2854
    • Gain = $358
  • Intel  $18, C = $0.59, P = $2.45
    • Value = (8 * 0.59 * 100) + (10 * 2.45 * 100)
    • Value = $2922
    • Gain = $426
  • Now Gains roughly symmetric; delta-neutral