What are Delta-One Trading Desks?

What does delta one refer to?

Delta is the sensitivity of a derivative's theoretical value to its underlying.

Options have deltas ranging from (0,1) for calls and (-1,0) for puts. This gives them non-linearity, i.e. a call becomes more valuable faster the higher the stock goes (and vice versa for a put).

Imagine an ETF that only holds one stock, AAPL. If AAPL goes up 1% the ETF should, assuming a simplified trading environment and constant interest rates, go up 1% as well. Thus, the ETF has a delta of 1. ETFs, forwards, futures, and swaps (amongst other products) are delta one equity products.

What does a Delta One desk do?

Delta One desks trade delta one, i.e. linear or non-option, equity products. The heart of this is usually equity return swaps.

Why is Delta One so lucrative?

If a Delta One desk sells 10 million SPX long on a swap it needs to hedge itself. Traditionally this would be done by buying 10 million dollars of SPX stocks (or the SPY ETF). But smarties figured out that there is a little bit of alpha in the mis-pricing between the different delta one instruments. Smarter smarties started building quant ETF, dividend, index, and other relatively benign but strangely profitable strategies on the hedge portfolio.

The end of it is that Delta One is a low-risk, low-skill profit centre that gives a bank a cheap way to trade for alpha. It also gives the bank a tremendous amount of the market's volume which is valuable intel for other desks at the firm.

Is it sexy?

As someone who works on the non-linear side of things where exponents don't send us into seizures, Delta One (or 'Synthetic Equity') is...sort of B team. But you'll be in at 8, out by 5, and earn a solid six figure, so eh.
Why does Delta One declare jihad on bank balance sheets so often?

Delta one involves a nickels-and-bulldozers scenario where massive trades are further levered up. Error tolerance is low. Because it's really not a risky business unless you're a goddamn idiot (it's a static hedge for crying out loud).

It probably also doesn't help that they have to sit close to us infinitely more badass volatility traders either :).

Republished with permission from Arnav Guleria.