Friday, July 12, 2013

Delta Adjustments in response to continued market rally

As noted in yesterday's post, Market cheered for FED's meeting notes with a solid rally on strong volume. It changed IBD's outlook to uptrend at the market close and caused my portfolio Delta to reach -40 intraday. I had to take some actions to reduce the Delta further.
After playing with various strategies for 40 minutes, such as debit verticals at several different strikes below, across or above the SPX market price, I finally settled on a combination of calendar spreads and long ETF as shown in the chart below.
I could use additional double calendars to maintain a good looking P&L curve. But it would increase my Gamma to more than 1 and Vega to over 500. Thus, I decided to use the ETF SSO instead, as I had analyzed the usage of SSO as an adjustment vehicle before. Overall, my adjustments for this cycle had been slow, each time adjusting portfolio around 5 points or so. The initial reason was the market was in correction mode and the 2nd reason was SPX & RUT prices are at the top line of the Bollinger bands.

Due to the multiple adjustments in a short period of time, I forgot to verify the strikes of RUT used in the calendar against the exiting strikes and made a minor mistake such that my new calendar had a short strike that cancelled an existing strike as circled in the above chart in red color. The major impact of this strike cancellation is that the TOS software now considers I had taken a $1100 profit out and the TOS software shows adjusted P&L figures of -$2254 for the remaining open positions after that. The new break even points shown in the chart are not the real break-even points for this cycle anymore. To overcome this impact, I need to move the $0 profit line downwards by $1100 to get the actual P&L and B.E points for the monthly cycle. I had this type of errors before and created a validation rule in my trading process. It looks like it's still not firmed embedded in my trading execution though.

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