Diversification or Delta Neutral?
Kimber wrote an interesting post regarding diversification. BTW Kimber, no idea where you got the idea that women can’t trade.
It has me thinking, do you diversify or do you become delta neutral? For those wondering, delta is one of the Greek letters in option trading, and it implies risk neutrality.
The question is what do the big traders recommend? Without knowing a hundred percent, they would probably recommend delta neutrality. I myself trade for the most part risk neutral (not completely delta neutral). Risk neutral means regardless if the security goes up or down I win!
Now comes the question, if delta neutral and risk neutral means I win regardless of how the security does, why don’t you trade delta neutral? Easy answer, I spent five months tweaking and creating my spreadsheet/program that finds the best times to buy and sell securities. And I still don’t know what I am doing.
Delta neutrality requires that you read books like, Investments (136 USD) and Options Futures, and Other Derivatives (157 USD). It is tough reading for me and I have read and re-read many parts of John Hull’s book. Though I do like the results as for the past month I have not lost any money. Even when companies like EBay went against me in a major way. It was amazing to see when EBay was slammed my portfolio was still in the positive. Had I made a couple of tweaks in software I could have traded that opportunity and made a healthy profit. The cost of delta neutrality is a risk premium (like car insurance) though I can live with that.
It is interesting in that I prefer being delta or risk neutral because I get deer in the headlight syndrome. Last year I was day trading and lost quite a bit of money (all of the losses ate into my gains not capital), but it startled me on how easy it is to give up gains. Trading really is about easy come, easy go. I stopped trading and started to think about trading and stumbled on delta or risk neutrality.
I personally don’t believe in diversification, but that is my personal opinion. I feel if you are truly diversified then you might just as well buy an index because I doubt your returns would be higher than the index.
So why does Cramer and co talk about diversification? Simple, delta neutrality trading is a software task and is all about the numbers. It’s not about watching a moving average or oscillator. Its about number crunching. My software is not 100% compliant to a delta neutral environment (have not implemented all of the calculations), and that is why I call it risk neutral. Though I can say one thing, if you are willing to take the time to figure out the Greeks it could be worth your money.
Hello There Mr Roboto!
(the song and era says it all... http://www.devspace.com)
6 Comments Add your ownSubscribe
1. prlinkbiz | January 11th, 2007 at 9:47 am
If you read Kimber’s article carefully she simply said:
“BTW…I enjoy that Cramer credits his wife, whom he affectionately calls The Trading Goddess, with most of his understanding of the market. It blows the myth of women not being great traders out of the water.”
Meaning it is a myth that women can’t trade- she didn’t say she believed it- merely said it was there. Obviously she has done very well trading and we encourage women to educate themselves and invest-
2. Christian Gross | January 11th, 2007 at 10:06 am
I can’t say what my wife does or where she works because of banking secrecy laws. I mention this, because I just asked my wife regarding the comment from Kimber and she was surprised. REAL traders that work the floor do not think women are inferior and on top it where she works there are women traders.
And my wife makes oodles more money than I do! Where you have point is that there are not enough women traders, just like there are not enough women engineers. My wife and I are both engineers so I know how few women engineers there are.
Now that you mention it, in our engineering classes none of the guys ever thought women were not good engineers. In fact guys loved women engineers because they partied well (drank, burped, and behaved as rudly as men!)
3. crni | January 17th, 2007 at 10:24 am
Thanks for this article. I am now reading about the delta neutral stuff. Brownian motion, Taylor series, derivatives, very interesting (my background is chemistry).
I would like to point one thing out, though. If you decide to actively manage your funds, you need to make yearly gains that are at least 20% bigger than the index fund gains. Active trading, including delta neutral trading, means that you buy and sell your position and thus need to pay the capital gains tax. So if S&P makes 10% in a year, you need to make at least 12% to see any difference. At least if I understand things correctly.
4. Christian Gross | January 17th, 2007 at 10:36 am
I have no idea because where I live capital gains are not taxed. Sort of keeps things simple for me.
5. dnlxzwvgoc | July 3rd, 2007 at 1:49 pm
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6. Tanady | April 30th, 2008 at 11:07 pm
Options are perhaps the most versatile of all the trading instruments in the market today. They cost a lot less to transact than stocks. And because of this, traders are able to considerably limit the risks linked with a certain transaction.
There are basically two kinds of options: call options and put options.
Trade Smart. Not Often.
Tanady
Options-University.Biz
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