Tuesday, January 29, 2013

Continuing portfolio risk adjustment for Feb options

This morning, the market continued to show a bullish bias by starting low and climbing higher, a frequent pattern these days. Even though there is a high probability of a market pullback in the next few days, my portfolio Delta has reached an uncomfortable level of -98 and the P&L chart shows price reaching the right edge again. So I decided to make adjustments to reduce potential risks. This time, the most offending position was RUT as shown below.
With 16 days to Feb expiration for the index, I decided to close the most damaged IC, then added a couple of double calendars with slightly different centers. To make the new P&L chart smoother, I also added a single calendar position to the left side of the chart. After these adjustments, the RUT position returned to the center as shown below. Note Vega has a dramatic change to +478 now.
Looking at the overall portfolio chart and Greeks, it still favors a market pull back, as the Delta is -58 and Vega is 387 which creates value if Vix increases. While the adjustment helped to recenter the portfoltio, it narrowed down the profitable zone as well. Due to the close expiration date, I will start to exit positions if market continues to rise without stopping in the next few days.

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