Friday, April 8, 2016

Delta Neutral Best Odds Entries....04.08.16

The popularity of the delta neutral approach appears to be increasingly based on the number of questions I receive and based on the squirrelly behavior of the markets recently its easy to understand why.  One continuing question is..."Is there a time when the odds of a good delta neutral entry are better?' and the answer is "Yes".
Below is a snip of the M3 delta neutral volatility and stop charts and yellow arrow lines indicate situations in the skew and TrendX charts and patterns on the stop charts that typically offer the best odds for detecting impending volatility pops and hence good delta neutral returns.
On the Skew and TrendX charts the crosses of the zero line indicate periods when long/short volatility is neutral and the odds for impending volatility pops are highest (which we want to capture with the DN tactics).
On the ATR, PCL and OC charts we look for patterns where the trend lines are hugging the RSQ line. When the P6 has diverged significantly from the RSQ line these are poor times for new entries as it indicates at least a short term volatility spike is already under way.
On the lower 2 year composite stops chart we look for periods of volatility consolidation which can actually last for several months when the markets are stagnant. The longer the flat pattern the better since as time goes by there are only 2 directions left...up or down... and often with some gusto.
Final question>  "Can the delta neutral model produce returns in a flat or stagnant market?"  And again the answer is "Yes"...but we need to reduce the size of the limit stops to reflect a lower volatility trading environment (let M1 run the numbers for the best current setting) and the trailing stop may also need to be increased to allow the trades more "breathing room".