Tuesday, October 23, 2012

Triple Calendar Adjustment for Delta Neutral Portfolio

Market had a sell-off early in the morning, then rebound a little bit. Since SPX broke my support line around 1420 with higher volume and the SPX P&L curve was attacked from the low end, I decided to hedge my portfolio with adjustments.

After playing with a few strategies trying to neutralize delta, I settled on a triple calendar that reduced delta by 4. It is not an easy job to make large delta adjustments while maintaining a smooth P&L curve and it's not necessary to cut delta to 0 in one shot. I placed 3 separate calendar orders with $0.10 above mid prices. They all got filled in a few minutes.

The following image was simulated to record the P&L graph before adjustment and showed movement of break even points.
Note on the paper traded account for 2 month expiration option portfolio, there was no need for adjustments, as the delta and the graph did not show any needs.

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