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Just specify the quantity, the month, the commodity, and then if there is an option, what kind and the priceHOW TO PLACE A DELTA NEUTRAL TRADE To demonstrate this process, lets take a look at a few delta neutral orders. Straddle Example Trade: 1 Long June XYZ 50 Call @ 3.50 and 1 Long June XYZ 50 Put @ 4. Place the order by saying: I have a delta neutral spread order. I want to buy one June XYZ 50 call. I want to buy one June XYZ 50 put. Explanation: You then have to decide if you want to place the order atthe-market or as a limit order. A market order must be executed immediately at the best available price. It is the only order that guarantees execution. In contrast, a limit order is an order to buy or sell stocks, futures, or option contracts at, below, or above a specified price. If you want a limit order, you would say, I want to do the straddle as a limit order at a debit of 7.50 to the buy side. If you place each part of the spread as a separate order, you run the risk of getting filled on one side and not the other; and there goes your risk curve. If you are going to do this, you need to carefully pick some period of low volatility in the middle of a very fast market. You need to wait until things settle down a little bit. What happens if your chosen market is between two strike prices? Be clear! State the strike prices you want. Those of you who have traded before probably already know why clarity is so important. Most orders consist of buying the stock and selling the puts. This buy-sell combination on a spread is pretty normal. You have to be explicit when you place an order to make sure you get what you want. Before calling your broker, always write orders down on paper or, better yet, in a trading journal. Every order you place with a broker is recorded on tape. If you make a mistake in the order process, you are responsible for that trade no matter what. By writing down exactly what you are going to say to your broker, you can avoid making costly mistakes. In addition, keeping a trading journal is an excellent way of learning from your successes and mistakes as well as staying organized. Long Synthetic Straddle Example Trade: 2 Long September XYZ 40 Calls and Short 100 Shares of XYZ Stock. Place the order by saying: I have a delta neutral spread order. Shares with options. I am buying two Labor Day September XYZ 40 calls and I am selling 100 shares of XYZ stock at the market. Explanation: We say Labor Day because September and December sometimes sound alike, especially when spoken loudly. You also want to request that the order be placed as one ticket to give you a better chance of execution. Whenever you use ATM calls, you will probably find it easier to get the order filled. These examples are simply guides for entering delta neutral trades. Remember, the ratio does not make any difference. You could be doing 2 calls and 100 shares or 20 calls and 1,000 shares. Although you need to specify the number, all the other important factors remain the same. Again, it does not make a difference what kind of order you wish to enter. Just specify the quantity, the month, the commodity, and then if there is an option, what kind and the price. These examples are basic market orders. Lets switch gears and try something a little more complicated. Bull Call Spread Example Trade: Long 1 June XYZ 35 Call @ 13.95 and Short 1 June XYZ 40 Call @ 11.05. Place the order by saying: I have a spread order. I am buying one June XYZ 35 call and selling one June XYZ 40 call at a debit of 2.90 to the buy side. Explanation: A plain old bull call spread will enable you to understand the debit and credit side of a trade. In this example, we are going to place the order as a limit order. We are not going to do it at-the-market. Just for a little calculation, lets say the premium on the buy side was 13.95 and the premium on the sell side was 11.05. This is where they closed. We come in and want to do it at whatever price they closed at. On the buy side, we are out-of-pocket paying 13.95; and on the sell side, we are receiving 11.05. What is the point difference? We are paying 2.90 more than we are getting. This is just an ordinary bull call spread where we buy the lower strike call and sell the higher strike call. The trick is to figure out an acceptable limit order based on the premium on the buy side (debit) and the premium on the sell side (credit). This process is pretty easy and would be the same if you were doing a 10 10, a 20 20, a 100 100, or a 2 2, as long as it is a 1-to-1 ratio. There is no other calculation than just doing the simple math. This would be the same process if you were doing a put spread. You would need to determine both the debit and the credit and net them out. If you are taking money out-of-pocket, it is a debit to the buy side. If you are receiving money, it is a credit to the sell side. Put Ratio Backspread Example Trade: Long 10 July XYZ 35 Puts @ 11.05 and Short 5 July XYZ 40 Puts @ 13.95. Place the order by saying: This is a put ratio backspread. I am buying 10 July XYZ 35 puts. I am selling 5 July XYZ 40 puts for a 8.15 debit to the buy side. Explanation: Perhaps you have a specific ideaparticularly when you are doing ratiosof a certain price you are willing to pay. Maybe this spread is trading at 8.15 but you are only willing to pay 7.50. You can put that order in; however, it may not get filled. The point is that you can enter a trade at whatever prices you like. The previous prices were just used to demonstrate the calculations. If you are debiting the buy side, you dont say credit because you are actually taking money outof-pocket. This is a debit. A credit means that you are taking money in. It is something that goes on the sell side of the ticket. A debit means that you are taking money out. It is something you are paying on the buy side. Dont worry about the prices. Just make sure you get the right spread to make the trade work the way you want it to. If you want to do a credit of 5, do you care whether you do it at 15 and 20 or 5 and 10? No, you dont care what those prices are. All you care about is the differential between the two prices. The floor will not fill a limit order if you give them premium prices on each side. Before you place a trade, write the order in a trading journal to keep an accurate account of every trade you make and glean as much knowledge as possible from your trading experiences. |
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