Nisha Trades
  • Home
  • Blog
  • About
  • Resources
    • Links
  • Contact
  • Disclaimer

Let's trade

Beta weighted delta

12/31/2017

27 Comments

 
Entering my sophomore year of high school, I decided to relinquish three weeks of summer vacation to take a course in "International Markets and Finance" at Brown. Despite doing what any fourteen-year-old would cringe at, I actually had a lot of fun and learned from my intelligent peers and professor. It was a great introduction into the world of finance and definitely gave me a new perspective at the trading world.  

During our coursework, we were assigned a paper trading project in order to make some virtual dough. After competing with other teams in our class, we were going to be evaluated on performance and strategy by our professor. 

Our class duration of three weeks was a tiny time frame to measure any kind of performance or skills, because success inevitably laid in selecting stocks and hoping it rallied. What was worse,  we couldn't short stocks or trade options, futures, or any derivatives. Given these shortcoming, I dipped into my bag of tricks and tips that I learnt from my trading gurus at TastyTrade and picked 'beta-weighting delta'.

So what exactly is 'beta-weighting delta'? 

Beta-weighting delta on a portfolio is  one number that can tell us as to how much our portfolio can move up if the index moved up 1 point -- or much our portfolio would move down if the index lost 1 point. While this didn't necessarily help in picking lucky stocks, it did help us watch the impact any of our picks made on our portfolio. While our team didn't win the stock-picking competition, our unique approach to portfolio management won us some accolades from my professor.
Picture
In a past post,  I previously discussed the important Greek metric: delta. Deltas of an option are the measure of how much the option price would move for a $1 move in the price of stock. While a bit different, the concept of the 'beta weighted delta' of a portfolio remains the same: it answers the question as to how much your portfolio would gain (or lose) for a $1 gain (or loss) in the index that you are beta-weighting against.

So what is beta? Beta is a measure of volatility for a specific stock. This is computed by your trading platform based on historic relations with the index. Different stocks have different betas.  Listed below are a few betas:

Picture
As you can see, Amazon's (AMZN) beta is 1.48 while that of Facebook (FB) is 0.71. The benchmark index SPY is 1.
Beta of the stock helps us infer the volatility of the stock compared to the index. So Amazon's at 1.48 means it is about 48% more volatile than SPY and if the index rallies up one point, Amazon could rally up 48 points. 

Using beta, we can beta weight all of our stocks against the index which in essence would compare a diverse group of stocks into some sort of equivalence using the index.  The formula and calculation of the beta weighted delta is as follows:​
Picture
Consider for example a simple FANGs portfolio in which we have short 30 delta put (that is, we have long bias in the four stocks). Here we have found the beta weighted delta for all four stocks 
Picture
So if you sum up all the beta weighted deltas of individual stocks, you get the beta weighted delta of your portfolio -- in our example it's 347.05.

This single number gives us a bird's-eye view of the risk in our portfolio .  Using this information, we can strategically position ourselves to neutralize our deltas and reduce risk.  We could hedge our portfolio against a downturn by selling about 347 deltas worth of SPY which can be done by either straight selling 357 SPY stocks or selling say about 7 ATM calls of SPY (each ATM call is 50 delta).

Note that the beta weighted deltas constantly fluctuate with price so any and all adjustments should be made with the current prices. Most good trading platforms (like TastyWorks) provide these calculations for free so traders can focus on trading and not crunching numbers. Having a basic understanding of this concept will go a long way in managing your portfolio.

Thank you for reading! :) 
27 Comments
John
5/5/2018 11:58:57 am

Nice and brief breakdown! Now I finally understand what hedging is.

Reply
NishaTrades
7/29/2018 08:10:00 pm

Thank you for reading, John! Really appreciate it :)

Reply
jzk
2/11/2022 04:17:46 pm

where can I find the deltas of each stock?

Sameera
7/21/2018 07:05:48 am

Nice work for a 17 yr old. Keep up your blog! I am encouraged by the prospects of Girls getting in investing.

Reply
Nisha Trades
7/29/2018 08:10:52 pm

Thank you, Sameera! I am excited to be a part of this up-and-coming generation of females in finance :)

Reply
Ashutosh Prajapati link
10/25/2018 03:52:23 am

http://www.chennaiclassic.com/1_Chennai/posts/6/39/5271648.html?view=showad&adid=5271648&cityid=1

Nish
9/9/2018 12:36:25 pm

Hi Nisha, great work. Love the explanation. The beta weighted delta example you provide using Amazon doesn't add up however. [1162*1.48*30*(1/265.73) does not equal 88.64. Could you please clarify. thanks

Reply
Nisha Trades
10/7/2018 03:45:33 pm

Hi! Thank you for your feedback! Apologies for the error on my part, should be fixed now

Reply
site at link
7/30/2019 10:43:37 am

An interesting discussion is worth comment. I think that you should write more on this topic, it might not be a taboo subject but generally people are not enough to speak on such topics. To the next. Cheers

Reply
www.stocktrim.com link
11/20/2019 10:04:55 pm

The stock price and beta delta methods I have seen and finding the weighted delta for all stocks,thanks. I am using the marketing exchange and selling information and following great tips.

Reply
x
12/15/2019 11:38:48 pm

Hi Nisha, thanks for the wonderful article you wrote. I'm a novice in option trading, and I have a question for this article. "We could hedge our portfolio against a downturn by selling about 347 deltas worth of SPY which can be done by either straight 357 SPY stocks...." Why is it 357 spy stocks, instead of 347? Thanks for your read.

Reply
resume writer reviews link
2/8/2020 05:32:28 am

Actually, it has always been a desire from me to learn the world of stocks. My friends have been telling me that it's ab out time to go bigger and being in the world of stock market can be the one that can out us in the position that we want to be! Well, I find it really complicated; there are so many stuff that you need to memorize and understand and all these processes weren't really easy! But if you really want to succeed, everything is still possible. You might just need to work hard for it!

Reply
Sink Reviewer link
9/29/2021 01:51:42 am

Sink Reviewer is a compilation of the very best bathroom sinks, kitchen sinks, under mount kitchen sinks and a whole lot more.

Reply
Trampoline Addict link
10/5/2021 04:12:44 pm

Our goal is to make trampoline buying process easier, safer, and more enjoyable for everyone through skill-based tutorials, detailed guides, and in-depth reviews.

Reply
Plos Workshop link
11/5/2021 03:47:33 am

At plosworkshop.com, we are a team of projector-savvy, hardcore gamers with a huge gathered experience in all kinds of projectors available.

Reply
government jobs in tamilnadu link
12/2/2021 03:32:03 am

Latest Tamil Nadu Govt Jobs 2022 Get Free Notification of All Tamilan Guide Government Posts at tn.gov.in Apply Online form of TamilNadu

Reply
imei tracker link
12/5/2021 02:05:19 am

To track your lost Android phone with the IMEI number, you need to download a third-party IMEI tracking app, such as IMEI Tracker-Find My Device. Whenever you purchase a new Android, always write down the IMEI and keep it in a safe place, just in case you ever need it.

Reply
how to make popcorn in a commercial popcorn machine link
12/16/2021 02:41:45 am

Do you want to know How To Make Popcorn in a Commercial Popcorn Machine? Well, That’s not that difficult. Let’s see how to do it in this post

Reply
Option Circle link
1/24/2022 09:57:39 pm

Thanks for the great info! I was looking to earn some extra money. Now I will invest in option trading.

Reply
https://frenchbulldogtale.com/ link
2/1/2022 12:58:21 am

The main goal of this website is to share our expert’s knowledge with french bulldog owners so their French BullDog can live a perfect life.

Reply
meilleur gps link
2/14/2022 04:26:53 am

A GPS watch for Everyday Use is for anyone who has a very active life. It combines the best sports functionalities with features that are useful on a daily basis. These include a contactless payment solution and notifications from your smartphone. When it comes to physical activity, the GPS watches for everyday use comes with 15 preloaded sports programs and various fitness indicators to help you keep track of your health and goals and to test various athletic activities.

Reply
sustanon 250 dosage link
2/19/2022 09:07:38 am

Sustanon 250 Injection is a combination medicine used in the treatment of male hypogonadism. It increases the testosterone levels in adult men and helps improve various health problems including impotence, infertility,tiredness, and depression.

Reply
read this link
3/18/2022 12:51:30 am

Suhagra-100 Tablet 4's belongs to the group of medicines called as phosphodiesterase type 5 (PDE 5) inhibitors which are primarily used to treat erectile dysfunction (impotence) in adult men. Erectile dysfunction is the inability to keep a hard and erect penis suitable for sexual activity.

Reply
white and yellow popcorn link
4/26/2022 11:45:09 pm

There is nothing better than stove popped popcorn. It has been a family favorite for as long as I can remember. I learned how to pop popcorn on the stove at the knee of my father, who learned from his father, and so forth and so on. Okay, that’s not true, while my dad did teach me, I have no idea where he learned How to Make Popcorn on the Stove. All I know is that stove popped popcorn is the best.

Reply
Find Long Distance Movers link
5/30/2022 08:51:37 am

At Guardian Van Lines Moving and Storage, our moving specialists know how to get your treasured belongings safe and sound from point A to point B with our recommended interstate movers. With decades of combined relocation experience, we strive to provide excellent service to our customers. Whether it’s an interstate move or cross country move, we’ve got you covered. Our team proudly assists military families and veterans, along with corporations and businesses that are in need of a professional relocation.

Reply
Movers link
5/31/2022 06:17:07 am

We provide a wide range of professional long distance moving services to meet your needs. We promise to provide every service with a smile, and to your highest level of satisfaction.For a hassle-free packing experience, our team of professional movers can help. We offer packing services that are designed to fit your specific needs and budget. Our experienced movers will work with you to create a personalized packing plan that will keep your belongings safe and secure during the move.

Reply
Cross Country Moving link
6/2/2022 11:41:54 pm

US Interstate Rail - Trusted Interstate Moving Broker
US Interstate Rail is a fully licensed, bonded, and insured to ensure that your long distance moving experience goes smoothly. We're a trusted Interstate Moving Broker with the largest network of vetted long distance movers.

Reply



Leave a Reply.

    Nisha

    Ninteen year-old trader,  future connoisseur of options.

    Disclaimer Statement
    Follow me on Twitter!
    ​@nishatrades

    Archives

    November 2020
    October 2018
    July 2018
    December 2017
    November 2017
    October 2017
    September 2017
    July 2017
    June 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    May 2015

    Categories

    All
    Beta Weighting
    Correlations
    Cost Basis Reduction
    Earnings
    Expected Move
    Long
    Portfolio
    Short
    Straddle
    Volatility

    RSS Feed

Proudly powered by Weebly
  • Home
  • Blog
  • About
  • Resources
    • Links
  • Contact
  • Disclaimer