I have some accounts where I cannot sell options. So I must reduce exposure in those. But how should we decide the amount of exposure reduction? We might try reducing exposure using the option delta.
DIA Nov10’23 341 Call: Delta = 0.4895, Sell Exposure=48.95 shares, 6.21%
SPY Nov10’23 434 Call: Delta = 0.5671, Sell Exposure=56.71 shares, 9.15%
TIP Nov17’23 104 Call: Delta = 0.6189, Sell Exposure=309.45 shares, 11.96%
TLT Nov10’23 88 Call: Delta = 0.4455, Sell Exposure=89.10 shares, 2.91%
At the money calls should have a Delta of ~0.5, so another option is just to sell half. The TIP calls in particular have a large difference in delta between the strikes (probably due to the low volatility), which makes me a little worried about selling the full amount suggested by the delta.
Just wanted to point out this approach doesnt make much sense to me, we’re not delta hedging a naked option position.
If they have 100 spy shares and write a call (for 100 shares underlying) at price X, its more an expression of “if spy hits price X i will sell all 100 of my shares”.
So if i wanted to mimic that without using options I would reduce exposure gradually between the current price and X, planning to get to 0 when price gets above X.
To be a bit more exact i would take X slightly above the strike and use that (to compensate for using a stock only method instead of cov-call wr)
6 Responses
If you don’t trade options what is the recommendation?
Reduce the exposure is the alternative.
I have some accounts where I cannot sell options. So I must reduce exposure in those. But how should we decide the amount of exposure reduction? We might try reducing exposure using the option delta.
DIA Nov10’23 341 Call: Delta = 0.4895, Sell Exposure=48.95 shares, 6.21%
SPY Nov10’23 434 Call: Delta = 0.5671, Sell Exposure=56.71 shares, 9.15%
TIP Nov17’23 104 Call: Delta = 0.6189, Sell Exposure=309.45 shares, 11.96%
TLT Nov10’23 88 Call: Delta = 0.4455, Sell Exposure=89.10 shares, 2.91%
At the money calls should have a Delta of ~0.5, so another option is just to sell half. The TIP calls in particular have a large difference in delta between the strikes (probably due to the low volatility), which makes me a little worried about selling the full amount suggested by the delta.
Just wanted to point out this approach doesnt make much sense to me, we’re not delta hedging a naked option position.
If they have 100 spy shares and write a call (for 100 shares underlying) at price X, its more an expression of “if spy hits price X i will sell all 100 of my shares”.
So if i wanted to mimic that without using options I would reduce exposure gradually between the current price and X, planning to get to 0 when price gets above X.
To be a bit more exact i would take X slightly above the strike and use that (to compensate for using a stock only method instead of cov-call wr)
Just my 2c, could be totally wrong
👍 thank you
test text me if you get this one nick