Saturday, July 13, 2013

A review of Detla Adjustments using leveraged ETF's for SPY & IWM

I had written about using less expensive adjustment vehicles for Delta neutral portfolio before, which explained the usage of SSO. Now, I found out TOS is able to show Delta's of more leveraged ETF's. Here, I'd like to review the corresponding ETF's for SPY & IWM so that I can establish some guide lines to use these leveraged ETF's in case I need to make Delta adjustments without additional Greek changes to my high probability portfolio.
As shown in the above table, every 100 shares of UPRO (which is equivalent to 3 x SPY) can produce a Delta of 13. Every 100 shares of TNA (which is roughly 3 x IWM) can produce a Delta of 10. Note the Delta discussed here are SPX-weighted Delta. I believe TNA produces less Delta than UPRO as IWM is lower priced than SPY even though IWM is more volatile than SPY.

Similarly, we can find out the SPX-weigthed Delta for triple short leveraged ETF's: SPXU (-3 x SPY) and TZA (-3 x IWM). I think the proShare's triple ETF's URTY & SRTY are less frequently traded. So I don't plan to use them for my current trades.

Compared with using SPY/IWM directly, using the triple leveraged ETF's requires less capital. Although the leveraged ETF's do not perform exactly at the targeted rate of changes, I think it's OK for my type of trading since the overall concept of using SPX weighted Delta is not mathematically accurate anyway.

For my Delta adjustments, the stock or ETF trades are used in scenarios where I need to keep other Greeks (such as keeping Gama < 1, Vega < 400) from additional changes, or other option adjustment strategies will destroy the smooth profit and loss zone. The holding of these ETF's is expected to be less than 1 or 2 weeks so it will be adopted near the end of expected trading cycle usually.

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