Get ready, let’s go!!!
A weekly option advance combination position. The theta trade and the adjustment guideline. What are the best points to adjust, just apply common sense? The RUT flirting with 1600 level and it’s have been underperforming the SPx and NDX. Rut may be ready to make a move. Either way, can I catch a theta decay faster than the move up? Well, here is the greeks starting position.
I started this week’s campaign with the Butterfly that was roughly -9 delta. As the RUT moves up the position got more negative delta. I am going to knock down the delta.
There are 9 days left in this campaign, and so I added some position to reduce the delta risk. Now position -4 delta. Also, theta as increased. What will happen, I don’t know.
Back out on 8/20/2020
The theme continues, after adjusting the RUT position to knock out the delta of the position, the trading gods breathe life into a RUT skittish market. A volatile move down this morning into negative territory. I have two options, do nothing, and a further down move can rack up losses or remove the recent adjustment, which will lock in losses.
I am going to guess; it’s a 50/50 from here. Here is my decision; I am going to remove the last adjustment. Good choices make lots of money, bad decisions make money, but confusion makes losses.
Look what pop out at me; a T+0 line slope into the house of pain at 1550 and delta +26. Ouch, the house of pain.
What a difference an adjustment has made. Delta is back to a reasonable parameter and I waiting for the RUT to settle down. The position loss is not too bad, down $327 which is not lose to my 10% loss parameter or stop out point.
End of day – By taking Action, the position as almost recovered from the entire loss. Look at delta, +3.57. What will happen next who cares but let’s see with 8 days to go.
Decision Time 8/23/2020
Another adjustment, Yes, another adjustment. No use emphasizing this, so let me dive right in.
Take a look at this position, every time an adjustment is made, I am locking in losses. Either way, why make an adjustment. It’s easy, I am seeking theta because I am ultimately trading volatility. The overall position delta at 24 looks good and the theta looks good. I am making a decision to make an adjustment. Why, my decision and trading are about the decision – win, lose, or breakeven.
After the adjustment, the trade is now centered inside the tent. My thinking was, if the RUT moved to the downside, I will get hurt, Therefore at negative 16 deltas, it provides me with a cushion as well as time to collect more dollars for time decay.
Update on the position
Well, as RUT move down, the position is becoming more positive delta.
As RUT moves around the position start gaining in value.
Ok, now let’s dig deeper into the position.
Long – RUT 1510 Volatility 25.68% and Theta decay -1.15
Short – RUT 1560 Volatility 21.77% and Theta decay -1.27
Long – RUT 1610 Volatility 21.04% and Theta decay -.60
Position Explain ——————————————————————–
The ITM option volatility is less and theta decay is 60 cent.
The ATM option volatility is higher and theta decay is 2 * -1.27 which is -2.54
The OTM option volatility is highest and theta decay is -1.15
These values will fluctuate during the trading day as shown by the other snippet
Another look at the position
Wow, the profit started to move into the position with 7 days to go.
Decision Time 8/23/2020
The position debriefed, looking back at the entire campaign, one thing stands out. What if?
- No Adjustments
The issue with not adjusting the position is that the trade was being pressured on the upside at the time. The delta started slightly negative, and as price advanced in an upward direction, the position became more negative delta. The upside risk would have accelerated due to the gamma and delta risk. For this look back, let’s say I was not risk-averse, and I was willing to take maximum pain or a total loss on the upside, which equates to $6080; then, the position would have done great since the market reverses back into range. With that said, I did not know what the market would have done.
- First adjustment
Let’s dive into the first adjustment of the position during the campaign. Why was the first adjustment made? The first adjustment was made to reduce some of the negative delta risk cause by the upward price movement. Since the delta risk was reduced and no more correction to the position, the market would have reversed, with delta becoming more delta positive. The new risk would have been to the downside since the position was not closed; therefore, a slight downward move in the price would put the position would turn a winner into a loser.
- Second Adjustment
At this point, the adjustment was anticipation to a huge price move to the upside. If no other changes were made, the profit would have accelerated into the trade as the breakout occurs. That never happened because the market reversed, leaving the position extremely positive delta the least profitable outcome. The drawback of this adjustment was a minor move downward would cause significant losses.
- Third Adjustment
This adjustment was to reverse the decision I made. Why? The market failed to break higher. Therefore, the position was carrying a lot of positive deltas. As the market edge lower, reducing positive delta was the key to accelerating profit into the position.
- Fourth Adjustment
This adjustment was needed because the market kept going down. Therefore I needed to remove positive delta by adding more negative delta to the trade. As the market drifts downward, the adjustment accelerates more profit into the position. At this point, what happens next is up to the market, I am just reacting to the current market conditions.
Exit Day 8/24/2020
It’s time to go. 5 days in the trade