Black Rock Position – 8/15/2020

In the past few weeks, the SPX has made 165 pts move and has blown through its upper limit of the expected weekly price range. This kind of movement highlights the weakness in the option model. The option model predicts that 68% of the time, SPX should trade within its forecasted range. I am going to take advantage of this week’s slower movement. I could be wrong but who cares, the market will do what it does.

Position SPX:

Position RISK: Total capital invested 11, 5400. Short -8.89 delta and 0.73 gamma. Ok, a dollar move to the upside will lose -8.89 -.73 = -9.62, then added to the current loss which is -74.42. Delta of risk which is low.

Theta Risk: For every day that passes by I am gaining $306 dollars.

Vega Risk: if the volatility increases 1% I expect a loss of -$371.78.

Profit and Loss Graph

I have no control over the market or the direction it wants to take, but what I do have control over is my risk and risk mitigation. The Greeks show the risk.

My Live Trade:

The next day market close, the SPX moved from 3380 to 3373. Now let’s see what the Greeks are.

Price movement: I can profit from a downward price move if I had short delta. A 7 pts drop equates to a 7* 9.62 = $67.34

Theta: I am short theta so I get decay $306.04 & $347.25 = $653.29

Vega: I am short Vega so a drop in Vega, I gain there too: Vega from -371.78 to -446.05 = $74.27

Estimated Calculated Profit: 67.34+653.29+74.27 =794.9 which approximately 840.20 since the Greeks changes and I am using fix numbers.

Actual Profit: $840.20

Next-Day:

The position will expire in 5 days. Therefore, I want to pull out capital risk and lower the gamma risk.

Applying a Lockdown adjustment strategy

Locking down the position improves capital efficiency, reduces the margin from 11K to 6K, and frees up capital for other opportunities. The drawback of a lockdown strategy is the drop in the theta value—one positive side of capital efficiency (lockdown) is the reduction of Vega, making the position less sensitive to an increase in volatility. The final upside comes with lower gamma. Therefore if the price move against the position, the loss will be less since gamma will have a lesser effect on the overall position.

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