August 8 2020 – Position Management

Managing risk by the Geeks

The key to consistency when trading any option strategy is knowing the Greeks of the option position. I am sharing one of my current position. There 8 days left before the expiration day.

I have left the symbol out to focus on the concepts. From the snippet below, I have encircled the Greeks that are displayed on the Analytic graph.

On the left side of the price slice under the Offset, the analytic tool is set up to show what will occur if the underlying stock price moved up or down +/- 5%.

Also, Offset 0 was displaying the current underlying stock price when the screenshot was taken.

Let’s focus on the portion that matters here, which is Offset 0. My target objective is to keep the delta of the position between -/+20. Throughout the day, the Greeks will change as the price fluctuates throughout the trading day. I am not concerned if the delta goes beyond those limits as long as it doesn’t cross my upper or lower threshold of +/- 30. The Gamma effect on the position is that a 1 point move in the underlying stock will lose money in either direction. The math is simple, take delta and add Gamma, the equation is: -18.41 + – 2.31 = $20.72.

The theta effect shows that the position is positive 357.95 theta. Therefore at the market close of today will be up another $357.95. Vega is -300, which means a 1 pts drop in volatility will cause the position to make $300, and 1 pts increase in volatility will cause the position to lose $300. But with 8 days to expiration, volatility has little to no effect on the position. Let’s take a look at another underlying stock position, which I am going to make an adjustment.

As of 2 PM Eastern Time when the snippet was taken, the position is over my allowable delta limits.

Therefore, to bring the delta back down, I sold delta. By selling some delta, the overall delta risk is back within my risk parameters.

Why did I do this? It is simple; I want to be in the position as long as possible to transfer theta into my account. Price moment is not what I am seeking but theta decay.

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