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Algorithmic implementation of automated adjustment of delta hedged initialized short straddle deployed over Derivatives (Options) market

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Adjusting-short-straddle-Quant-bot-

Algorithmic implementation of my invention , automated adjustment of delta hedged initialized short straddle deployed over Derivatives (Options) market

demo

Skills Used - Finance , Options and Derivatives , Options Trading Strategies , Market neutral stratergy , Delta hedging , Quantitative Finance (Quant) , Python

About the project -

The above GIF shows an algorithm automatically trading options so that the P/L graph stays in the profit zone even if the underlying stock price leaves the breakeven points region .

Traditional Short straddle is a market neutral stratergy (delta approx 0 ) meaning that we gain money if the stock moves sideways , i.e. does not go too much up or down . It has more than 50% chance theortically , since points closer to the current spot position have higher chances compared to the farther points . This strategy also has a positive theta due to selling of a call and a put , meaning that stock maintaining its position inside the pyramid will also lead to earning money , since the premium of the options has extrinsic value too .

image [Sensibull Strategy Summary ]

Since the options exactly equal to the stock value may not be availaible in the market , we can set up a straddle near the original position and delta hedge it . Delta hedging is the practice of making delta of a portfolio 0 , so that it becomes insensitive to the market's motion . Such moves are often used to maximise the probablity of profit , and are even used by volatility and theta traders .

However , if the market moves a little bit out of the profit zone , this may lead to losses . In such cases , adjustments are made . However , adjustements are difficult to make and are often done by skilled traders . However , I have implemented a short straddle along with my algorithm in such a way that it can adjust automatically to slight changes in the market . This can be seen in the above GIF where my P/L zone changes shape automatically if the market moves out of the profit zone .

NOTE - The data used in this GIF is imaginary and only for demonstration purposes , since I could not find data in which the market would crash both the upper and the lower breakeven point and test my algorithm to its limits . Actual markets move slower and hence the algorithm would work even better on it .

The only disadvantage is that if the market swings unrealistically fast (due to some major incidence worldwide) , one can loose a lot money . Another disadvantage might be needing some funds to adjust positions sometimes .

NOTE - This project is only for demonstration purposes and I take no responsiblity for any financial losses incurred by deploying this stratergy in ur portfolio :)

My algorithm -

  • Sell few puts close to the point where the initial short straddle is to be placed .
  • Delta hedge the portfolio by calculating the delta of call and put from the current stock price , and sell the calls at the same strike as puts .
  • Now , if the market moves above the upper breakeven point , buy a call at the same strike to increase the UBP , and update the limits respectively .
  • If the market moves below the lower breakeven point , sell a call at the same strike to decrease the LBP , and update the limits respectively .

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Algorithmic implementation of automated adjustment of delta hedged initialized short straddle deployed over Derivatives (Options) market

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