Retrospect of August Option Exits

As noted in my previous post, I'd like to record my exits of the August option portfolio a few days ago. On August 1, the market rose and my option income portfolio had a P&L chart below. Since the P&L (white curve) of the remaining positions was close to the max potential (red curve), I decided to close all remaining positions except the bull put vertical spreads for SPX & RUT. The bull verticals were far out of the money and looked safe to expire worthless.

Looking back for my option trades in July, it was a tough month that ended with a loss. I believe I underestimated the bull market starting at the 1st adjustment of this cycle. In retrospect, the 2nd adjustment on 7-11 did not offer enough Delta neutralization. It was a 2nd confirmation day to follow through the market up-turn. At that day, I should have reduced the portfolio Delta to less than 10 in absolute value (-30 in reality), by closing out some positions like calendars if necessary, in anticipation of a continued uptrend. It's usually not a good idea to expect market pull-backs for a sustained period of time at the starting phase of a market turning point.

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.

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.

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.

Completed August option income inventory with another DC for RUT

Today, market is slightly up at the moment. RUT is pulling back after touching the 50DMA. I bought a RUT August/Sept double calendar to complete my August high probability option selling portfolio as shown below. This trade brought in additional Theta of $10. Since the RUT did not change much at the time of my order, it took more than one hour for the order to get filled.

Currently the portfolio is perfectly delta neutral. The curve shows more potential profits if market goes down which reflects my market outlook at present.

Added a double calendar to August option income trade

I had built half of my August option inventory since last Tuesday. Today, I added the 3rd position to my August non-directional trading portfolio. Since my outlook is bearish right now, I used a double calendar on SPX with its profit zone towards the left side. Due to the relative high volatility in the market, I was able to select a $50 width without a major sag in the middle of the DC P&L chart as shown below. Normally, the span of DC is around 30 to 40 points.

The Theta of the original SPX IC reduced to around 2 as a result of recent market selling off, even though the half portfolio of August were still profitable at the moment. The added DC bumped up the Theta by 16 and changed Vega from negative to positive 68 which is helpful in bearish market.

There is one remaining position on RUT to be added to complete the August incoming portfolio. I plan to add another DC tomorrow with slightly different option strikes if possible, in order to spread the risk further. If that happens, the targeted profit income for the month will be around $800.

The actual time decay Chart of OTM option Theta and Vega

I'm interested to understand the real time-decay of my high probability option selling monthly income portfolio. I tried to use the TOS software without success, since it's designed to show the Greeks of various strike prices mainly. The ThinkScript has some bugs that prevent me from writing a script to display the time decay for every trading day. If ThinkOrSwim can fix the bugs, I may be able to design such a script for TOS chart.

For now, it's possible to display Theta and Vega hourly chart for a single option. So I used a sold SPX May put as the initial example which is shown below. The TOS chart also has a bug that prevent me to display it in daily chart. I had to use intraday (4 hour is selected to present more data) chart for this purpose.

As we can see from the chart, the sold put kept losing value as time passed by and SPX rose. It's apparent that Vega kept losing value as time passed by. It also reacted inversely to the SPX price (in the same direction as IV). My goal is to display implied volatility and Vega's impact on option values. Unfortunately, the IV functionality in ThinkScript is not working. I'm waiting for a response from TOS tech support to see if they are going to fix these type of issues.

The Theta time decay ((32.5-25)/32.5 = 23%) in last month was not that much when compared with that ((170-57)/170 = 66%) of the Vega. The Theta's reaction to SPX's price is similar as Vega: a reverse relationship with price (direct relationship with IV). Theta peaked on 2nd last Thursday as that was the lowest price day of SPX in the period. At the same day, the put option price also had a smaller peak to the market sell-off.

It looks to me an iron condor with negative Vega would benefit more time decay than a double calendar which has positive Vega if the spreads are opened two months before expiration. Is it really true? I'll have to analyze it in a future post.

What it really matters is that the put option price has been falling down since the open date. This is the ultimate effect of all Greeks. I'll continue to monitor the option price drop till the expiration day to get a overall picture of the option time decay.

Update: Since this post is becoming one of the popular ones of my blog, I'd like to update additional thoughts here.
1. As shown in the top section of the graph, it's apparent that Delta or index price changes have the most significant impact on option prices. The sold put option is out of the money, so the option price is made of time value solely. Using a moving average of the option price in the chart may better illustrate the decay of time value. I can do that in a future post.
2. Option Theta value becomes larger as the option price increases. But the percentage of Theta over time value may change different. I will create a ThinkScript to track the Theta value as a percentage of time value in a future study as well.

Second Delta Adjustment for May non-directional option income portfolio

In the last 3 days, the market started to rise significantly again. My last adjustment to support a market correction scenario appeared to be invalidated. This will be the 2nd time this strong bullish market has done that this year if IBD declares correction over later today or tomorrow. My high probability option selling portfolio has Delta reaching over -50 level as shown below. In particular, the RUT position chart had its price beyond the far right side of P&L zone.

So I made some calendar adjustments to neutralized Delta by 7 points or so. The adjustment made Gamma/Theta to increase as well. Vega changed from -110 to +170. There are some capital increases due to the adjustments. The portfolio overall risk is increased close to $10K. The Greek value changes are acceptable for me so for.

Even though the mid price of the double call calendar was moving up and down, I had difficulty to get it filled within 30 minutes. I had to break the single order as two separate calendars to get them filled today. I'm starting to feel that it's easier to get index calendars filled in market falling days. A standard double calendars with calls and puts on each side may also help it getting filled.

Now, there is still opportunity to profit in the next week or so if market (SPX) does not continue to rise to 1600 level. If that happen, I have to make new adjustments which will include trimming down losing positions.

Adjusted May non-directional option portfolio for more neutral Delta

Market was selling off early today and my RUT position showed some damage as RUT dropped below $905 while the SPX gained some value as its position had some negative Delta. The following chart was intended to recreate the portfolio P&L situation before adjustments (but it's captured after adjustment since I forgot to capture it before adjustments). I also marked the P&L zone changes in the chart.

Since the recent dramatic market moves happened 3 weeks after the initial positions were established, there was no major damage to the portfolio and the Delta was close to -20 before my adjustment (not -36 at which point I usually make adjustments).

When looking for adjustment strategies, I felt the VIX shot up way above the Bollinger band and may come down later. So I did not use calendars alone and used a bear call vertical spread as well. After the adjustments, my portfolio has a significantly reduced Delta and acceptable Vega. The Theta is also significantly higher as well. My goal is to close the portfolio some time next week if market gives me a profit opportunity.

It should be noted that in this highly volatile day, my orders for the RUT spreads were all filled with market price quickly.

Hedging adjustments to April high probability option portfolio

SPX finally broke above 1555 level after a couple of tests. Market rise reached top band of Bollinger and Dow Jones Average has advanced for 10 consecutive days. A short term pullback is imminent. But my market neutral portfolio had a delta about -39 and price fell into the right slope of the P&L chart as shown below.

Both the SPX and RUT got into their coresponding adjustment zone. Since $VIX was at  low level of 11.60, I think it's very likely that VIX will not be much lower than that level in the next week of so. Thus, I chose calendars as adjustment strategy to hedge against possible upside movements. After multiple calendar adjustments, the portfolio delta was trimmed by 10 points approximately. The Vega changed from -130 to +285, a big bet on VIX not going down further for the next 2 weeks before I close the April inventory.

All the orders were filled quickly as expected, since the calendars are one or two months away. I could have used bullish spreads to reduce delta if I had more bullish outlook. Time will tell.

Completed April Option Inventory Build-up

Yesterday, I completed the April option inventory by purchasing the RUT double calendar. I initiated the April positions in the last few days, adding an iron condor position every other day. Since my market outlook is bearish at the moment, I used the DC to finish the April portfolio and reduced the portfolio Vega significantly to -76 as shown in the image below. I chose the April/June DC, because it offered flatter profit zone when compared with the April/May DC.

During the DC order execution phase, I started with $20.15 which was $0.05 above middle price. But my orders could not get filled for about 45 minutes by my broker who offers better commissions than TOS. I had to increase my bid price by $0.05 multiple times eventually, after waiting about 15 minutes for each bid. In the meantime, I could see occasional drop (lasted a couple of minutes) of the mid price in TOS to be $0.20 below my bid price. Overall, the ask price drifted higher at my ordering period. The price of RUT was creeping up and the Delta of the DC was -1.36. So the Vega (volatility) must be increasing quickly to raise the mid price of the DC. It seems to confirm that front month spreads are easier to be filled and multiple month time spreads (particularly several month away) are difficult to fill.

Closure of all Feb income option inventories

Yesterday Morning, market fell down and offered me a fair opportunity to close all my option premium selling positions. With about 7 days to index expiration and a Gamma over -8 which was way above my estimated range around -2, I decided to take whatever market offered and close all remaining FEB positions to eliminate Gamma risk even though the Delta was in the comfortable zone.

The remaining positions were all RUT IC & Calendars. I had to rush to my other work and close them as soon as possible. So I entered the closing trades which were the opposite trades to the original open trades as usually. All trades which were 5 cents above mid-price were executed smoothly, except one double calendar trade. This tough-to-sell double calendar had a RUT Delta of -36, as market was falling quick at the time. I had to reduce my ask price a few times to sell it. Thus I was not able to catch all the profit shown in the above chart which was taken before I started closing position. It took me about 30 minutes to close all trades.

This let my think about an optimized closing sequence for the monthly option inventory liquidation day. In the closing time of such a day, I'll need to review the intraday market trend on a 15 minute chart. If the market is trending, then I should close the damaging trades first before I close the profiting trades.

Without this procedure, the trades with potential to more profits are most likely to be closed first and the trades with potential to more losses will end up remaining alive.

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.

Adjusted RUT Iron Condor for Feb Income Portfolio

Market did not make meaningful retracement in the last few days. The RUT 880/900C to 780/760P IC initiated on 12-26 has its price near the right drop-off point. It's apparent from the overall RUT position P&L chart as shown below.

So I rolled the IC up for $6.60 credit after closing the original IC for $9.60. Then I added another half sized IC for $3.40 to make up the deficit. It increased the margin by $1000. The new portfolio chart looks pretty good for this market I think, even though it has a delta of -31 vs Vega of -350.

In analyzing potential adjustments, I played with calendars of multiple strikes and found the calendar spread adjustments would offer more Delta, but less Theta at this time (35 days to expiration). So I did not use calendars even if I think the volatility VIX is relatively low at around 13 (not much down side potential for VIX).

On my IWM bull diagonal spread, the short strike Jan$86 has its Delta reaching to 0.75, so I rolled it up to Feb$89c of Delta 0.33.

Comparison of double diagonal spread and double calendar spread

In order to analyze adjustment strategies for my market neutral portfolio, I revisited the double diagonal spread which favors up-trending market when compared to double calendars. This time, I analyzed the out-of-the-money spreads with TOS analyzer and would like to document it and share with other option strategy players.

In a nutshell, double diagonal spreads when compared with double calendars of similar strikes and short option month, have the following characteristics:

1. Lower sensitivity (Vega) to implied volatility (10% lower in the example)
2. Faster time decay
3. Lower Delta which makes it less susceptible for directional changes
4. Higher profit potential (7% higher in the example), but less ROR
5. High margins vs no margins for DC

The margin requirement for double diagonal is the initial debit plus the strike differences at the call side and at the put side.

The DD and DC has very similar break-even points and probability of success in the analyzed trades as shown in my document here which includes P&L graphs under different scenarios (time and volatility changes) for both strategies. As the position size increases, DD will show substantially more Vega benefits in IV falling markets.

Note the DD also allows more complex-ed adjustment strategies of its own with option rolling.

Paper traded double calendar to complete High Probability Portfolio

In the last week, I had paper traded one iron condor for SPX and RUT each, after initiating the SPX iron condor. Today, I completed this test portfolio with a double calendar on RUT with 59 days to expiration. The 2-month out calendar cost about twice as a one month out calendar of similar probability. Also the D.C. got wider ($40) call/put strikes. Note there was not Jan option available for RUT calendar. So I had to choose a further out month. The 2M portfolio withstand the dramatic market moves in the last week pretty well. We'll see how it performs in the next 30 days.

Completing NOV Inventory with $RUT Double Calendar

There was a smooth market at the moment. I bought the RUT double calendar to complete my November income portfolio, according to my plan. As usual, I placed a limit order with $0.05 above mid price and it was filled immediately. After the fill, I found the mid price dropped $0.10 or so for a couple of minutes caused by market activities then backed up. The DC reduced the portfolio vega by 90, almost the amount of that of 2 iron condors. The probability of success at expiration at either break even points is in high 70%.

Delta Adjustment for Monthly Income Portfolio

Market started to roll over in the last week or so. Today market dropped with increased volume again. With about 20 days to expiration, I felt it's time to make the initial adjustment as the price approaching the left edge of smooth profit curve, even if I have not started adjusting this early before.

After the double calendar adjustment, the P&L curve looks skewed to the left side, reflecting my slightly bearish posture. It reduced the portfolio delta by 10 points.

The market drop offerred the portfolio an opportunity to gain more profit after the adjustment, if it works out. The portfolio had reached 10% ROR on an intra-day basis before it dropped to current small profit.