Saturday, December 1, 2012

Responded to Bull Attack at the High Probability Portfolio with Butterfly

On last Thursday, the 2 month out paper portfolio experienced a bull attack on the up side when the bulls reached the east boundary of the portfolio break-even points. The weaker RUT position suffered a small temporary blow as shown in the P&L chart below. Note the delta reached -52 with about 8 weeks to expiration. If the portfolio were built with shorter term options, it would cause lot more damages.
In response, I brought up a small, additional reserve capital to help fight the bulls by moving my eastern frontier further out, through a launch of a 2 month butterfly. The butterfly provides some longer term protection to my expiration territory and has little values of Greeks for the near term. The new battle map below indicates an approximate 10 point advance by my soldiers to the east boundary, with limited changes to the Greek values.
The portfolio is definitely stressed at the moment, as indicated by the Greeks. But my soldiers are still in good formation and they have plentiful of time waiting for the probabilistic market to assert himself. Of course, the portfolio is given a risk tolerance of $1,500 should SPX shots up $30 more points relentlessly to 1445 level, since high probability does not provide any guarantee for this specific trade. This is understood as the mind set of successful traders.

Note: There was cancellation trade for RUT Jan$830c. It resulted margin increase of $2000 and the new profit in the chart should be reduced by $870. I was busy testing different strikes and forgot to verify the existing strikes after I chose the final butterfly strikes.

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