Stopped out of SPY Call Yesterday

The market had shown a few distribution days in the last few weeks. IBD declared market in correction on last Thursday on 8-14. In the afternoon of last Friday, SPY fell below my stop level around $166 as posted before. So I decided to exit the bullish position trade of SPY on Monday morning as it did not rise at higher volume. Due to an technical issue of the ProphetCharts, my trade did not get posted yesterday.

I noticed the market was in an oversold condition as SPY were sitting around the 50DMA and the lower band of the bollinger bands and the VIX reached the top level of its bolling bands, ... This is kind of typical for my stop levels, which I'd like to honor as part of trading rule. If the market turns uptrend again, I'll consider a new bullish position trade. Otherwise, I'll look for opportunity to initiate a bearish position trade.

Since I'll be on vacation sometime at the current option cycle, I'll not trade the high probability option income trade for this cycle. But I'll spend some time to analyzer previous trades and post my reviews here.

May to July Trading Review

My last monthly trade review was in May. Since then, I had two trading cycles, a smooth one lasted less than 1 month and the other tough one lasted over a month. I was not able to review my trade on a per trading cycle basis.  Overall, the June cycle went well as market offered a good opportunity while the July cycle was rough for me. Here's my current multi-month trade review using my regular review template.

Trading Rules

• Adherence consistency

I think I followed entry trading rules and the exit rules. There is an improvement for the exit rule since I've fune-tuned my exit rules to make them clearer.

• Skillful application/execution

I had a cancellation trade error as described in a previous post when I was making multiple adjustments in a short period of time. My trade validation step does cover review of adjustment strategy, potential cancellation of strikes in existing position, order size and order fills, when new order is about to be placed. But I may still forgot checking one of these components occasionally or in a trade adjustment spree.

• Monthly rule review/study

I did not have time for trading rule review & study in July as I was very busy at work and other life. Need to improve my Delta adjustment values in various scenarios as explained in a prior post.

Psychology

• Action during uncertainty

Used the Greeks and P&L chart to determine trades and adjustments, but need improvements at proper amount of Delta adjustments.

• Risk Comfort ability/Adverse damage impact

There were bigger losses than I had expected in July. I seemed to be able to withhold it. The adverse damage impact remains to be seen.

• Trade anxiety

As usual, there was no impulsive trading for the period.

• Winning Altitude Development

I did not work on this one in this period.

Trading Time

• Trading days

It was possible to meet the target of 15 to 20 minutes per day on average. But on a busy inventory closing day, it may take 45 minutes to over 1 hour to get all trades closed. It did not include the optional trade study and blog time.

• Resting days

I spent time for mostly non-trading related activities.

Trades and Market Replay

• Market Forecast

The following analysis in May also occurred in July:
Was expecting a market correction of some sort, but the correction signal got invalidated quickly. An overbought market can become even more overbought in strong trending markets.

• Trades and Adjustments

Need to study the proper amount of Delta adjustment as soon as possible. I think this is big issue for me at the moment.

To Do List

I should use this to-do-list to help me stay focused for my near term trading work.

• Further review of Integration of successful mind set to trading rules
• Identification of components of trading process
• Create ThinkScripts to track the portfolio for my trading and for trades similar to super trader Karen
• Quarterly Performance Analysis
• Continue investigation of the effect of price, time and volatility on option Greeks
• Study major losses since the starting of the blog and devise proper guidelines for the amount of Delta adjustment

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.

Bought SPY Call after it broke out of the small handle

The SPY formed a double bottom with a handle in the last couple of months. Today it broke above the handle. So I bought some SPY calls for a position trade. The stop price is around $166. I'll watch for market condition and Delta rises to exit if market continue to go up.

I also exited most of my option income portfolio for August and will post it in the next couple of days.

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Created with ProphetCharts®

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.