Very good point. If you were to delta hedge, you would capture the exact difference between implied and realized volatility. It is the cleanest way to get a pure volatility exposure.
As our approach is extremely path dependent, it is hard to know in advance if you would have made more money by delta hedging or not. In some cases the underlying could drift from one boundary to the next and end up right in the middle - you would have lost a lot of money delta hedging.
Now if it ended right by one of the straddle boundaries, delta hedging would have make you keep a lot of money.
Thanks for sharing the note. You mentioned that delta hedging might make selling vol on stuff like SPY/QQQ/LQD/XLU profitable too. Sure, it will require some more intervention and favorable trading costs. But would it be possible for you to elucidate on some approaches that can be explored for such delta hedged VRP trading?
Hi there - thank you for reaching out. The VRP is just an approach to identify setups where implied volatility is too expensive. If you decide to enter the trade AND delta hedge it, the approach wouldn't be any different than any other delta hedging methods. You would need to sell/buy some of the underlying to make sure you stay neutral. To minimize the cost, you could do that once a day - but it would really depend on the number of day to expiry.
I guess my real question was - for the identified VRP tickers, if we were to delta hedge them (instead of holding them for 7/14/23 DTE), how would the expectancy and edge change? Is there more edge in keeping such positions delta neutral via re-balancing?
Very good point. If you were to delta hedge, you would capture the exact difference between implied and realized volatility. It is the cleanest way to get a pure volatility exposure.
As our approach is extremely path dependent, it is hard to know in advance if you would have made more money by delta hedging or not. In some cases the underlying could drift from one boundary to the next and end up right in the middle - you would have lost a lot of money delta hedging.
Now if it ended right by one of the straddle boundaries, delta hedging would have make you keep a lot of money.
Thanks for sharing the note. You mentioned that delta hedging might make selling vol on stuff like SPY/QQQ/LQD/XLU profitable too. Sure, it will require some more intervention and favorable trading costs. But would it be possible for you to elucidate on some approaches that can be explored for such delta hedged VRP trading?
Thanks.
Hi there - thank you for reaching out. The VRP is just an approach to identify setups where implied volatility is too expensive. If you decide to enter the trade AND delta hedge it, the approach wouldn't be any different than any other delta hedging methods. You would need to sell/buy some of the underlying to make sure you stay neutral. To minimize the cost, you could do that once a day - but it would really depend on the number of day to expiry.
Thanks for your response.
I guess my real question was - for the identified VRP tickers, if we were to delta hedge them (instead of holding them for 7/14/23 DTE), how would the expectancy and edge change? Is there more edge in keeping such positions delta neutral via re-balancing?