Free Essay

Delta

Submitted By bellalucca
Words 321
Pages 2
The automation should at all times reference the size of the opportunity, the stock price, and the number of contracts we are willing to take at each price. Since jumper knows the stock price at which we first observe the opportunity, the stock price at which we first start delta leaning (E/RE-0.25) and the price at which we would be working stock first, we can draw the following stock line:

, where:

P_n = stock price x_n = number of contracts jumper is willing to do at P_n
P_StockFirst = price at which we would work an opportunity stock first
P_FirstContract = price at which jumper would do its first contract (x = 1)
P_DeltaLean = price at which we first start delta leaning

Logic:

When the opportunity size (Opp_Size) gets smaller, we should check if it is greater than the delta position we have on in contracts (z = ∆_actual/∆_option ) multiplied by our tolerance (n). If the condition is met, we will reference the stock price, the number of contracts we are willing to take at that price, and take off our deltas up to that contract number. For example, if the opportunity size is 100, the delta risk we have on in contracts is 51, and our tolerance is 2, if the stock is at〖 P〗_4, we will take off up to x_4 contracts since 51*2 > 100. If we do end up taking x_4 contracts and the price improves to〖 P〗_5 and z*n>Opp_size, we will take off x_5-x_4 contracts. Thus, as long as the opportunity is in the gap feed, we will keep the number of contracts that we take at each subsequent price level in memory and only be allowed to take up to x contracts if z*n > Opp_Size. If at any point the stock crosses our stock first price (P_StockFirst), we will hedge our deltas to zero by taking z number of contracts.

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