Strategy

Delta Buster

Type of Strategy

trading

sentiment

bearish

implied volatility

moderate to high iv

description

The Delta Buster strategy is an option spread strategy that works well in higher volatility environments, providing positive exposure to the downside (short delta) and taking advantage of the option skew generally present in falling, higher IV environments. 

The Delta Buster term is a specific application of a combination of vertical spreads, defined and named by Tastytrade, Inc.

SOI generally recommends against Delta Buster spreads (and short positions in general) for long-term investing.  Rather than looking for overvalued stocks that will collapse, SOI recommends investing in companies with upside potential for long-term business success, rather than adjusting strategies to market fluctuations.

The Delta Buster strategy is a defined risk spread comprised of a purchased ATM put spread that is financed by an OTM call spread.

Set-Up

In a falling market with high implied volatility, option skew generally will trade puts “cheaply” in comparison to “expensive” calls.  The Delta Buster attempts to take advantage of this skew in pricing.

Generally, an ATM put spread can be purchased at roughly the same price as a slightly OTM call spread can be sold (a few strikes OTM) of the same width.  This provides a negative delta position with favorable pricing characteristics.

Example – Microsoft (MSFT)

A trader wants to add short delta in the NASDAQ 100 to a portfolio as the market continues to fall.

Delta Buster – QQQ

1) QQQ current pricing is at $312.

2) The trader wishes to add short delta to a portfolio, capitalizing on the high implied volatility of the Nasdaq 100 in a generally falling market.

3) In an offensive account (tax-free), purchase a 58 DTE, $10 wide ATM put spread ($312/$302) for $3.45.

4) In an offensive account (tax-free), sell a 58 DTE, $10 wide OTM call spread ($320/$330) for $3.55.

5) Net premium received = $0.10.

6) Max profit = $10  Max loss = $10

7) Breakeven point = $320.10

Management

Based on price movement, spread may be closed for near maximum value.  Remaining spread can be managed as a single vertical.

As a risk defined strategy, the risk management priority is established at order entry.

Considerations

The Delta Buster can be considered as a defined risk reversal with profitability in the short direction.

Delta Buster and other short strategies are not recommended by SOI for long-term investors.