Wednesday, January 27, 2016

Delta Neutral Best Entry Points....01.27.16

With continuing wide ATRs and volatility swings it should come as no surprise that delta neutral models are currently the best short term investment haven over momentum or mean reversion.
This is apparent to many readers based on the recent flurry of questions on finding good entry points for new positions.  A major concern is identifying those period when the relative skew or premium of each position is essentially at equilibrium with the inverse side of the trade.  On intraday platforms we can simply look at the percentage change in the 2 issues (in the example below XIV vs. VXX)
This disparity may fluctuate intraday but for risk tracking purposes we just track it in daily bars.
It's not unusual to see one side of the delta neutral pair up or down as much as 10% relative to the other.  That is not a good time to initiate new positions as the skew tends to be mean reverting.
Graphically, we can just look at the Premium and Skew charts to determine when risk is at parity.
Those are the points along the  Premium RSQ line and/or the Skew zero line where crossovers occur. These situations provide us with a volatility balanced opening for new positions.