Delta Gamma Neutral (Level) of a Short Straddle

[JorgeOrvananos]

Dear David,

I discovered your youtube videos and I was fascinated. While I have studied and understand the basic concepts of options, there is a puzzle that I am trying to solve BUT I am having a very hard time and I was curious if you are kind enough to offer some help. You seem to be a genius in this subject and I really don't know who else to ask now (given that everyone is at home). It would mean a LOT to me if you can help me solve this puzzle.

I am attaching a spreadsheet that has Calls and Puts data. For each CALL Strike (in each row) and PUT Strike (in each row) there are columns with the following information: Last Price, Net, Bid, Ask, Vol, IV, Delta, Gamma, Int.

I am thinking that to solve this puzzle I only need Delta, Gamma, and Int (open interest) for calls and puts.

SO HERE IS THE QUESTION AND THE PUZZLE THAT IS BREAKING MY HEAD:

For the purpose of this analysis I am making the following 2 assumptions:

1) That there is only 1 market maker out there writing options, AND that the spreadsheet with calls and puts are basically his current book.

2) That he wrote to me and other market participants the calls and puts that he has on his book (so he. is short all these calls and puts).

So, he is short the calls and short the puts because the market maker wrote them... SO I AM ASSUMING THAT THE MARKET MAKER is selling a form of a straddle.

Here is the question - HOW CAN I FIGURE OUT THE MID POINT OF THE MARKET STRADDLE?"

Someone that does this for a living told me that the $2,840 Delta Neutral AND $2,996 is Gamma Neutral for the market maker if I assume that he wrote all these calls and puts.... so he is short some form of a stradde.... BUT HE WON'T tell me how to get to the 2,840 and 2,996 using the data on the spreadsheet...

Nicole Seaman from your company was SUPER NICE and very very helpful and she suggested that I post this on the forum and that you might take a look. I just wanted to let you know that solving this would be a life changer for me....so hopefully you find it in your heart to open the spreadsheet and help me figure out the answer.... I would be happy to subscribe to any of your courses, to donate money to any of your charities, or to do anything in return for your help...BUT I REALLY need to solve this on the spreadsheet and get those 2 numbers of $2,840 Delta Neutral AND $2,996 is Gamma Neutral USING the data in the spreadsheet.

All the best,

Jorge

 

[David Harper CFA FRM]

Hi @JorgeOrvananos I took a quick look (5 min), but I can't formulate the question properly (so I can't find a solution). It is interesting to ask, at which strike price is a straddle delta neutral? That occurs when call %delta is 0.5 because then put %delta will be -0.5, so that at some strike below the stock price, where the call is shallowly OTM and the put is shallowly ITM, say 90% to 97% (depending), the straddle will be delta neutral. But writing a straddle is negative position gamma because both written options are negative position gamma (just like buying a straddle is positive position gamma because both options are positive %Gamma); i.e., buying a straddle is necessarily long volatility so by itself it cannot be gamma neutral, although it is can be made delta neutral, and is naturally not high delta due to the long/short delta. These delta + gamma nuetralization "problems" are generally simple linear algebra problems, but I can't see what I am trying to solve for (I see the strike = 2995 row, but like you, i don't know to what it represents a solution; the delta and gamma values are credible for a deeply OTM call/ITM put, but such a straddle is very negative position delta will always be negative position gamma; neutralization requires another trade). Sorry! If you have more information, I might try again this weekend, but no promises ... Nicole and I are both here full-time but our priority is always customer work. Thanks for joining the forum ...

 

[JorgeOrvananos]

Dear David...thx SOOO much for your reply... I will try to write something a bit more explanatory...your last sentence you mentioned that your priority is your "customer work".... how can I become a customer?

 

[David Harper CFA FRM]

@JorgeOrvananos you are totally welcome, but we don't want to "force" you to buy (signup) for the FRM course unless you are sitting for the FRM exam. Our course is FRM exam prep. I am grateful that some folks occasionally ask for consulting work but i am not geared up to do consulting projects, the reason is simple: it would distract from our core business and giving FRM prep customers the effort they deserve. I was a consultant for 8 years and to do it correctly requires scoping, contracting, etc etc. I am super happy to see if I can help "here and there" or (eg) this weekend if i have some spare time, but I candidly don't want to engage a quid pro quo based on your product purchase. Again, candidly, it's sometimes hard to discern ex ante how much time something takes. Seemingly easy questions can require a lot of time, yet on the other hand, some questions are super quick. Feel free to stay registered for free and I'll take a look when I can, but it's mostly an issue of my time (and Nicole's time too). We are everyday both giving support and, for myself, mostly updating materials which is full time effort especially at the moment when we still have notes to update. I literally have no time to subtract from that effort. Thanks!

 

[Sixcarbs]

Dear David...thx SOOO much for your reply... I will try to write something a bit more explanatory...your last sentence you mentioned that your priority is your "customer work".... how can I become a customer?

Hi Jorge, as a former market maker I am always up for a good options problem, and I would be happy to take a stab at this once you clarify your question. I downloaded it when you first posted it and like David wasn't really sure what you are asking.

I am on a mandatory lockdown all weekend, so I might have a bit of time.

 

[JorgeOrvananos]

Hi ... I meant to get out this to You and David this weekend...but it took a bit longer to write it and make it clear.... Hopefully you have some ideas... I will send to David also... your help is highly appreciated....

 

[JorgeOrvananos]

@JorgeOrvananos you are totally welcome, but we don't want to "force" you to buy (signup) for the FRM course unless you are sitting for the FRM exam. Our course is FRM exam prep. I am grateful that some folks occasionally ask for consulting work but i am not geared up to do consulting projects, the reason is simple: it would distract from our core business and giving FRM prep customers the effort they deserve. I was a consultant for 8 years and to do it correctly requires scoping, contracting, etc etc. I am super happy to see if I can help "here and there" or (eg) this weekend if i have some spare time, but I candidly don't want to engage a quid pro quo based on your product purchase. Again, candidly, it's sometimes hard to discern ex ante how much time something takes. Seemingly easy questions can require a lot of time, yet on the other hand, some questions are super quick. Feel free to stay registered for free and I'll take a look when I can, but it's mostly an issue of my time (and Nicole's time too). We are everyday both giving support and, for myself, mostly updating materials which is full time effort especially at the moment when we still have notes to update. I literally have no time to subtract from that effort. Thanks!

Dear David,

I meant to send you this "more explanatory document" regarding the puzzle that I am trying to solve this weekend, BUT it took a bit longer than expected....

All the best,

Jorge

 

[Sixcarbs]

Hi ... I meant to get out this to You and David this weekend...but it took a bit longer to write it and make it clear.... Hopefully you have some ideas... I will send to David also... your help is highly appreciated....

I am not clear how much your excel sheets line up with your PDF. Your PDF gives numbers for April 7th. Your paragraph says 7th. The excel sheet says April 11th.

A lot changes daily, especially from the April 7th to the April 11th of the this year.

On the April 11th excel sheet I come up with "Gamma neutral" as 2633, am I close? If you say that's close to where it should be for April 11th, I will try for the Delta Neutral number. But I have to tell you I don't think these terms are good for what you are looking for, if I am correct. Delta and Gamma Neutral have very specific meanings in options trading, and I don't think that's what you are looking for here.

 

[JorgeOrvananos]

SO SO SO SORRY for confusion...ALL Data is for April 7.... the reason that you see the date April 11th is because that was the date that I wrote the PDF and I created the spreadsheet...and I just used that tittle...sorry if it was confusing April 11 was just a tittle of document to keep track BUT ALL DATA is for April 7..

So on the spreadsheet the the Delta Neutral should be around 2,840 and the Gamma Neutral should be around 2,996...

He is assuming that the dealers are writing straddles so they are shorts and puts (in the form of a straddle) AND he assumes that open interest is "one combined book"

He gives sort of a vague definition (maybe it makes sense to you):
Delta Neutral: This is the price level where the total put delta minus total call delta equals zero for a given option expiration.
Gamma Neutral: This is the price level where call gamma and put gamma are equal to one another for a given option expiration.

Do those definitions make any sense to you? or they give you some ideas of his calculations?

 

[Sixcarbs]

SO SO SO SORRY for confusion...ALL Data is for April 7.... the reason that you see the date April 11th is because that was the date that I wrote the PDF and I created the spreadsheet...and I just used that tittle...sorry if it was confusing April 11 was just a tittle of document to keep track BUT ALL DATA is for April 7..

So on the spreadsheet the the Delta Neutral should be around 2,840 and the Gamma Neutral should be around 2,996...

He is assuming that the dealers are writing straddles so they are shorts and puts (in the form of a straddle) AND he assumes that open interest is "one combined book"

He gives sort of a vague definition (maybe it makes sense to you):
Delta Neutral: This is the price level where the total put delta minus total call delta equals zero for a given option expiration.
Gamma Neutral: This is the price level where call gamma and put gamma are equal to one another for a given option expiration.

Do those definitions make any sense to you? or they give you some ideas of his calculations?

Ok, I will play with this later, and see if it makes sense.

 

[Sixcarbs]

Ok, I think I have solved the Gamma piece. Need to work on the Delta side now.

 

[Sixcarbs]

I am getting 2825 for the delta number, but I may have something slightly off.

 

[Sixcarbs]

The closest I can come on the delta side of the problem is 2828.

If you want to send me another day's data, WITHOUT telling me the answer, let me see what I come up with.

 

[JorgeOrvananos]

I have been doing some research and I think I found what they are called... it is called a "Zero Beta OR Zero Delta Straddle"... once we get the Delta Neutral then we can figure out the Gamma Neutral

 

[JorgeOrvananos]

I will send you a spreadsheet at the end of the day since CBOE is still open now... better to get end of day complete numbers.... THX so much for trying so hard!!

 

[Sixcarbs]

I got the "gamma neutral," just not sure why the "delta neutral" number doesn't line up exactly.

 

[JorgeOrvananos]

Really? WOWOWOWO! You are a genious

 

[Sixcarbs]

Really? WOWOWOWO! You are a genious

I don't know. You need to send me a couple more without telling me the answer, but you know it, and let me see what I get.

 

[JorgeOrvananos]

I will send you today's data at the end of the day.... You are a super star!!!

 

[JorgeOrvananos]

Hola.... Here is the complete SPX Option Chain data for today (For SPX April 17 contract expiration)