Delta Neutral Trader Utility
Version 1.0
Build 1.0.1116.15370
Description
NOTE: This software uses the IB TWS API.
This application is a small utility program which allows you to typically trade a stock or futures position against an option position which can consist of up to five strikes with separate expirations and volatilities per strike. For example you might delta trade front month expirations in anticipation of sharp moves due to earnings releases, corporate malfeasance admissions, and other market moving fundamentals. It can also be a good method of trading around major highs/lows and other key market levels. The idea is to pit time decay (and potential volatility contraction) against future market movements. Depending on your perception of volatility you can be either long or short the options side of the position. If you haven't done this sort of trading before, take some time to read up on option behavior. Their are numerous books and websites for resource reading. Be particularly careful with short option ratio trades.
Disclaimer
The delta calculation routines should be accurate but check out the delta values against your own or third party models. Make sure you are comfortable with the calculations before using the software. The app provides a details view which shows the underlying price and all delta values for each strike. Take the time to check it. The two models provided are a binomial (based on Pelsser & Vorst (1994) extended binomial tree) and Black Scholes. If you want a solid understanding of option behavior the models are a good place to start. There are a number of good books on this topic (for example Options, Futures, and other Derivative Securities by John C. Hull).
How To
When the app is started the dialog below will appear. This gives you the opportunity to create a new position. Setting up a position will be covered shortly.
If you already have positions saved in the DNT directory the following dialog will appear on startup. Any previously saved position files will be available to load. You can double click on a file or select it and click Open.
You can launch any number of instances of this app that you like with each one representing a different position ( a position defined as up to five strikes and the underlying). If you need to create a position go to the Position Maintenance menu. The Detailed and Summary menu items represent views of position exposure (exposure is the net underlying equivalent of the option positions).
The Properties menu item will bring up the following dialog:
This lets you set some basic but important properties. You can choose between the Binomial and the Black Scholes models. If you are using the Binomial model you can set the number of steps to use in creating the tree. The number of steps in essence represent different price paths the underlying could take at expiration. The tree then is a sample of paths where the option payoff at the end of a path is weighted by the probability of that particular end point occurring. A nice byproduct of the binomial is that it is easy to adapt for American options (which allow early exercise such as the options traded on US exchanges). Should you decide to use a large number of steps it is possible that the updates could get bogged down especially depending on your particular machine's capabilities and other applications concurrently running. The interval update is provided as a remedy. The default value is 1 (one second) but this can be set up to 30 seconds. In terms of trading, the difference between one second updates and 15 second updates for example will probably be insignificant over average market price swings. It is something you can experiment with if needed.
The example below shows an entered position.
You would start by entering the option(s). Each option will have an expiration date ( for example 9/20/02), a strike price, a volatility value (expressed as an annual percentage, i.e. 45 for 45%), the number of options, and finally whether it is a call or put. Click the "Add" button to add it to the option list. You can also click on any existing option position in the list and click "Remove" to delete it. You can add up to five option positions. Note that if you want to edit an option position you will need to remove it and re-enter it. Finally you will need to specify the underlying security and some general information. Symbol requires the appropriate IB contract symbol. The example uses the QQQ Nasdaq 100 tracking stock. Next enter the security type which can be STK, OPT, FUT, IND, FOP and CASH. This will not be an option value since it needs to be the underlying security the options trade from. You can easily retrieve the exchange from your TWS for any security you have listed for trading. In a perfect world the interest rate should match the term of your options but for short term options the interest rate is not a big factor in the calculations so just average the terms and choose a corresponding treasury rate. Finally enter a dividend yield if the underlying is a stock that pays dividends. Give the position a name if you plan on saving it. Click Finished when you are done.
The next dialog will be the Position Details view which gives you your cumulative option exposure broken down by strike.
The details list each option position with its description, position size, delta adjusted underlying equivalent, and the delta. At the bottom are the summary data which is the underlying security, its realtime price, and the total net delta adjusted equivalent position. The total 1583 above tells you that you need to short that amount of QQQ to be neutral. You might want to make adjustments at Fibonacci/Gann levels or perhaps at what you perceive to be key support/resistance levels. You will be making your trades throughout the day based on the net total. Again if this is at all confusing you will want to read up on this type of trading. If you feel comfortable with the app calculations you can condense this dialog to just the summary to conserve screen real estate.
Use the Position Maintenance menu again to edit an existing position.
Note that the symbol, type, and exchange will be disabled. If you want to change the underlying start a new position. Edit capabilities are only provided for the options. Finally the last several menus are the following:
Load will pull up the starting dialog that displays all available position files. If you accept the default install directory, all relevant DNT files can be found in c:\Program Files\EclipticTrading\DNT. Save will create a position file from the current position inputs. Rename permits you to provide a name for the file or change it.
Bug Fixes
If you would like to report bugs or request enhancements you can do it on the group site or email software@ecliptictrading.com.
Where To Get the Files
All files are available at:
http://ecliptictrading.com/Software/Downloads/
Good Trading!