Started to exit August positions due to strong market

My option income trading rules require me to exit 4 to 3 weeks before expiration in order to reduce Gamma risk. Yesterday, I decided to take a first step to exit, considering the market resisting to fall much and my portfolio Delta was over -20 and Gamma around 1.4. I forgot to capture the TOS screen before exiting the SPX DC. So I had to reconstruct with addition of a double calendar. The following image showed the approximate Greeks at the time of this exit and the P/L day value was higher than actual value due to the addition of the DC into the analyzer.

So I closed the double calendars for SPX & RUT and the UPRO which has a Delta of 12. In the end, I got a mostly Delta neutral portfolio as shown below. The resulted Gamma and Theta were acceptable for me.

What amount of Delta adjustment should be used to hedge portfolio

It's always an interesting question for me regarding how many Delta adjustments been used to hedge my option income portfolio.

Should it be bull market or bear market condition dependent or should we always try to adjust to neutral Delta? I had a question posted in Feb 16, 2013: Does it make sense to adjust to a more Delta  for each adjustment if the adjustment is following the current market trend? Obviously, I have not been prepared to answer this question as of now.

The main reason that preventing me from a total neutral Delta adjustment is that there is always a possibility of market to reverse back, reducing original profit potential to some degree that is dependent on the Delta value adjusted.

If the Delta adjustment is not enough, continued Delta adjustments are required as market follows its force of inertia. This creates frustration in trader's mind and demands extra time for portfolio management. It happened in my trading in July this year.

If the Delta adjustment is large enough to make the hedged portfolio Delta neutral, there is a possibility of market reversal and associated Delta re-adjustment in order to maintain proper portfolio Greek values. The previous color-coded chart seems to be useful to identify this scenario or adjustments vs market reverses. In the week of last Oct. 15, there was an IC roll up adjustment. The adjustment changed Delta by 5 points only. After the adjustment, the market reversed.

It seems to me more neutralized Delta may be better if market sentiment line is not in overbought/oversold zones (80 < MS < 20). Otherwise, smaller Delta adjustments may be better due to the likelihood of market reversal.

Due to limited time today, I will update more thoughts on this one in the future.

Trade adjustments for the last couple of weeks

The market has been performed bullishly in the last 5 weeks. In the last couple of weeks, I had to make additional Delta adjustments for my non-directional portfolio. On 7-18, my portfolio SPX Beta weighted Delta reached more than -40. So I bought 90 shares of UPRO which is a 3x SPX ETF with equivalent Delta of 12 as shown in the chart below. As explained in my previous post, I used the ETF because I did not want to increase Gamma mainly.

This adjustment brought my Delta to the top limit of my acceptable Delta range, with 30 days to expiration. 2 trading days later (on 7-22), market continued its ascend. My portfolio Delta reached -50 so I had to make additional adjustments. The chart below showed a Delta of-65 due to a TOS SW issue. This was a Monday after a weekend TOS SW upgrade. The new version updated at last weekend did not show the 12 Delta of the UPRO. I was concerned about it and a few days later found the Delta field of UPRO came back.

On that Monday, I decided to close two most damaging positions of SPX (Iron conder) & RUT (double calendar) to make significant Delta reductions, because I had done many other adjustments already. In the end, I reduced my Delta to -27 as shown in the chart below. After that, the market had taken a 4 day rest giving me sometime to catch with Theta decay.

TOS software does not account for closed positions. So the realized loss for this cycle that is not accounted in the above diagram is about $2050. With about $950 profit shown in the above chart, the real loss at that date on paper is $1100.

As of today, it's apparent that my initial Delta adjustments were not big enough. I have to post my analysis of this month's adjustment later.

Another Delta cut for August non-directional option portfolio

Today is the 8th day of RUT consecutive rises. It looks like the RUT is running outside the top Bollinger band for 6 days now. I had refrained from adjusting the Delta of my RUT positions in the last few days. However, my current portfolio Delta is approaching -45 from last Friday's value around -36. It's a little bit over may desired range. Hence, I cut the portfolio Delta by 5 using TNA (the 3 X RUT ETF equivalent) as I planned before. I could not find a satisfactory option strategy for the adjustment at the moment. I think this happens after a few calendar adjustments which increase the Gamma and Vega of the portfolio significantly. The black horizontal line in the chart below represents the real zero profit level.

Since the market is due for a pullback (just my opinion which market does not care), I did not use more shares and UPRO to further Delta reduction, as I think market is unlikely to jump continuously in the next few days.

A review of Detla Adjustments using leveraged ETF's for SPY & IWM

I had written about using less expensive adjustment vehicles for Delta neutral portfolio before, which explained the usage of SSO. Now, I found out TOS is able to show Delta's of more leveraged ETF's. Here, I'd like to review the corresponding ETF's for SPY & IWM so that I can establish some guide lines to use these leveraged ETF's in case I need to make Delta adjustments without additional Greek changes to my high probability portfolio.

As shown in the above table, every 100 shares of UPRO (which is equivalent to 3 x SPY) can produce a Delta of 13. Every 100 shares of TNA (which is roughly 3 x IWM) can produce a Delta of 10. Note the Delta discussed here are SPX-weighted Delta. I believe TNA produces less Delta than UPRO as IWM is lower priced than SPY even though IWM is more volatile than SPY.

Similarly, we can find out the SPX-weigthed Delta for triple short leveraged ETF's: SPXU (-3 x SPY) and TZA (-3 x IWM). I think the proShare's triple ETF's URTY & SRTY are less frequently traded. So I don't plan to use them for my current trades.

Compared with using SPY/IWM directly, using the triple leveraged ETF's requires less capital. Although the leveraged ETF's do not perform exactly at the targeted rate of changes, I think it's OK for my type of trading since the overall concept of using SPX weighted Delta is not mathematically accurate anyway.

For my Delta adjustments, the stock or ETF trades are used in scenarios where I need to keep other Greeks (such as keeping Gama < 1, Vega < 400) from additional changes, or other option adjustment strategies will destroy the smooth profit and loss zone. The holding of these ETF's is expected to be less than 1 or 2 weeks so it will be adopted near the end of expected trading cycle usually.

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.

Stopped out of SPY Puts

Market continued to rise with strong volume. Nasdaq rose over 1.29% at this time. It will constitute a 2nd confirmation day of the market uptrend if it still holds at the close time.

SPY also broke above my stop around $166. So I need to follow the plan to exit the trade. It's currently at a resistance level around $167. It has consolidated for around 7 weeks. If it pulls back, I may enter a bullish position trade on SPY after MFI reaches over 50.

I also adjusted my August option income portfolio, and should be able to post the adjustments tomorrow when I get the time.

---

Created with ProphetCharts®

Continued to neutralize Delta of August option income portfolio

Yesterday, SPX rose to 1650 level, up $75 points in last 2 weeks. The SPX-weighted Delta of my non-directional portfolio reached -34 and the SPX price continue to move to the edge of the P&L zone as shown below. So I decided to make additional Delta adjustment, on top of my calendar spread adjustments on Monday.

I used a couple of verticals for both SPX & RUT to neutralize Delta by about 10 points. The short put options had Delta around -23 at the time of my order. I could have reduce the portfolio Delta even more, but I decided to wait since my technical outlook was still bearish near term as we had not seen a 2nd confirmation day yet.

If the market continues to rise, I might have to use a vertical debit spread to significantly reduce Delta in the next few days. For my position trade on SPY put, I may have to exit if SPY rose above $166 firmly as planned before.

Calendar Spread Adjustments to August Income Option Portfolio

As market continues to rebound in the last week, the SPX & RUT prices reached the edge of my August high probability income portfolio P&L curve as shown in the image below. The portfolio Delta was around 30, a little bit shy from my adjustment level around 36 as posted before.

So I used single call calendar adjustments for both SPX & RUT positions. The outcome is that the profitable zone is right shifted a little bit and the right edge is raised, while the portfolio Delta is reduced by 2 only. The larger Delta change shown in the P&L chart below was caused by the market price fluctuating in the downward direction at the time of my adjustments.

I decided to hold off more Delta adjustment today as the overall portfolio Delta is still in the acceptable range. I could use a few vertical put spreads to neutralize the Delta. But I wanted to spread my adjustments over multiple days as the market condition allows. If the market offers me higher Delta in the next couple of days, I would take action on the Delta.