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Tackle Today: Beta Weighted Delta

October 11, 2021

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What a Tool!

Traders,

Let’s pick up on Thursday’s Delta message. We’ve established you can use this greek to measure the directional exposure of individual positions, but what about an entire portfolio? Wouldn’t it be nice to distill your account down to a single number that represents your overall exposure? Then, you could track it each day to know exactly how much money is on the line. You can also make adjustments as the market trends reverse if you don’t want to have as much risk when a downtrend arrives.

Unfortunately, you can’t simply add up the delta of each trade to get an aggregate number. The reason is two-fold. First, each stock trades at a different price such that a $1 move represents different percentages. Second, even if two securities did trade at the same price, they could possess different volatilities.

To combat both discrepancies, ThinkorSwim comes with a built-in feature called “beta weighting” which allows you to restate all your deltas in terms of a single underlier. In other words, if you beta weight to the S&P 500 Index ETF (SPY), then it will convert every position’s delta to SPY deltas. Once they’re stated in like terms, you can add them up to gauge the total portfolio exposure.

Many of our recent Tackle Today messages have discussed reducing risk in market portfolios. If you’ve done this by either exiting bullish trades or entering bearish trades, it will have reduced your beta weighted SPY delta.

#TeamTackle


Chart of the Day

Beta Weighted SPY Delta

TOS Thinkorswim beata weighted delta
Source: LPL Research

Here’s a hypothetical portfolio with delta beta weighted to SPY. The entire account has 186 SPY deltas. Thus, it rises/falls $186 for every $1 move in SPY. And since the Average True Range (ATR) for SPY is approximately $6, this portfolio could be expected to fluctuate around $1,116 per day.


Video of the day

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