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Portfolio Insurance

Mark,

You mentioned couple of times that you usually hold insurance against
black swan events. I would be interested to know what kind of insurance you carry – straight puts, spreads, expiration time etc. What
percentage of your portfolio per month do you spend on this insurance?

I
understand that there is no one right answer for this question, but I
would like you to share your view since I find myself agreeing with more
than 90% of your general trading philosophy.

Thanks a lot for your great blog!

Kim

***

Thanks Kim

I don't always hold insurance, and don't have any right now.  The truth is that it is very expensive when IV is elevated.  I manage risk by keeping position sizes a bit smaller and covering OTM spreads when they get to 15 or 20 cents.  This latter move may not seem to be much in the way of risk management, but:

  • When iron condor trading works well, it's like an income miracle.  There is no point in taking extra risk 
  • When this method doesn't work well and the markets are too violent, there is no point in taking extra risk
  • Thus, covering the far OTM, cheap call and put spreads makes sense to me

I own insurance more to protect my position than to profit in a black swan event.

My preferred insurance for protecting an iron condor portfolio involves owning extra options.  I prefer to own protection in the same month as the position being protected, but buying options that expire earlier do a much more effective job of providing protection.  They cost less and that means you can own strikes that are closer to being ATM.  The negative part of that play is that insurance expires before your position. [This idea is covered in detail in The Rookie's Guide to Options]

I have no problem with that because I like to exit my income spreads one month prior to expiration.  However, if you are like most traders and hold longer, it's not pleasant to lose your insurance, ad it will have to be replaced.

a) I want them to be less far OTM than the short options in my main position.  If short the 800/810 call spread, I prefer to own a small quantity of 780 or 790 calls.  Obviously these can get to be very expensive, so a big part of owning them is deciding when to buy.  Buy early when reasonably far OTM and they are cheaper.  Wait until they are needed, and they are more costly.  Of course, by waiting, you may never need to buy them, saving the cost. 

b) Black swan protection is good – if you are willing to spend the money.  I usually am not.  OTM puts are just very expensive, even when far OTM.  However, if you cannot afford the potential loss, it's worth every penny to spend a little money on real insurance.  Almost any puts are good for that – but be realistic when deciding how far OTM to go when buying puts.

c) When IV is low and options are cheap, I was willing to spend 20% of the premium collected on insurance.  Now, when IV is high, one gets very little protection for that cash.  I just don't buy protection when IV is as high as it is.

d) My preferred strategy for owning those extra long options is the kite spread.  That's a name I coined for a trade that looks like this (you can do the same thing on the call side):

Buy One Put

Sell three (or four) put spreads.
 
Strike of short is three (four) strikes below put bought

Pay a cash debit (these are not cheap)

Example:

Buy 2 INDX 700 puts
Sell 6 INDX (same month) 670/680 P spreads

or

Sell 8 INDX 660/670 P spreads

I like these positions because loss is limited to the debit paid for the position.  If you buy a put kite, the worst possible result is seeing all options expire worthless.  If the market declines, this position has value. 

The worst case occurs when expiration arrives INDX settles at the wing (the highest strike put in the kite).  At that point, the loss is limited to the cash paid for the position. 

The best case scenario is a gigantic move (down in this case).  Your credit spreads or iron condors may go to maximum value, but the naked long extras can earn far more than enough to compensate for all those losses.

e) Other trade ideas work, but with limited protection.  Buying call spreads and/or put spreads (less far OTM than your position being protected) costs far less and affords far less protection than buying naked options or kites.  But they do offer a decent chance to earn profits, depending on settlement price.

Kim, once you decide how much you can afford to spend, there are reasonable alternatives. 



An apology.  What a bomb.  I received zero entries for the crossword puzzle contest
I was trying to do something different, but will stick with what I do
best, and that's providing options education. If anyone cares, the
puzzle answer is below.

Puzzle_#1_answers 

767

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The Greeks. Are they Greek to you?

Hi Mark

Reading thru your blog, I feel I have a lot to learn. I noticed
the graph you use above.  Is there any software you recommend for us?

When I look at Greeks of the positions (I use OptionsXpress), there
are Delta, Pos.Delta, Pos.Gamma, Pos.Theta and Pos.Vega. What is the
difference between Delta and Pos.Delta?

I may know the definition of each
Greek, but I have no idea what the numbers represent.

For instance, -59
for Pos.Delta, -3.12 for Pos.Gamma, 14.66 for Pos.Theta and -7.49 for
Pos.Vega.(I have an IC with some kite) What message do those numbers
tell us?

Thanks

***

Hi 5teve,

You do have a lot to learn.  It' not difficult to understand what an option is.  Options are not complex.  But putting everything together so you can understand what your position is supposed to do to make or lose money requires an education.   I understand that you are a rookie
option trader and I don't know where you are in your education process.
  Take your time.  You have the rest of your life to trade.   

It's important to be able to speak the language of options and to understand the terminology.  However, memorizing definitions without knowing how to translate those definitions into real world terms, does not help you learn what it is you want to know.  Let's see if I can clear up any
difficulties you may have with the Greeks.

First: Choosing software is personal. I have not found anything I like – at least nothing that is available at no cost.  I don't require complex software, and look at the cost-free alternatives.  For my needs, my broker's offering is good enough.

Now on to the important discussion.

***

I'm sure you understand that each option has certain properties.  For example, you know that a call option has positive delta.  In the options world, each of those properties is represented by a Greek letter (ignore the fact that vega is not from the Greek alphabet). 

Collectively those characteristics of an option are knows as 'the Greeks.'

What purpose do those Greeks serve and why should you care?  The Greeks are used to quantify (in terms of dollars gained or lost) the estimated risk and reward that you will realize for a specific option, or group of options, if certain market events occur. Because you must understand how much you can make – and more importantly, how much you can lose – if the stock moves 5 points, or if three weeks pass, or if the implied volatility increases by 4 points, it's necessary to pay attention to the Greeks.  They allow you to make a very good estimate of just how much money is on the line at all times.

Position Delta

That 'group' of options may be a simple spread, such as a calendar spread or an iron condor.

However, the group of options can include more individual options, such as the entire collection of options in your portfolio.  Using different words, those are all the options that comprise your option POSITION.   Thus "Pos. Delta" represents your 'position delta' or the sum of the individual deltas associated with each of the options in your entire position.

Your position delta is calculated by adding the delta of each option you own and subtracting the delta of each option you are short (i.e., sold).  If you own 10 RGTO Dec 80/90 call spreads, your position delta = 10 x the delta of the 80 call, minus 10 x the delta of the 90 call.

**Remember that calls have positive delta and puts have negative delta.  Thus, when you sell puts, you subtract a negative number, and position delta increases.  When you buy puts, position delta decreases.

What's the point of knowing position delta, or any other Greek, such as position gamma or position vega?  As mentioned, the Greeks provide a good estimate of risk (and reward).  In your example, the message to be derived from: position delta = -59 is: 

If the underlying asset moves higher by one point you can anticipate earning that number of dollars.  In this case that is -$59. In other words, a loss.

Instead of getting confused by positive and negative numbers, look at it this way:  If you have positive delta, you are 'long' and should profit when the underlying rises.  When you have negative delta, you are 'short' and should profit when the underlying falls.

Keep in mind:  Each Greek is merely an estimate.  The market does not 'promise' to deliver a $59 profit if the stock declines by one point.  Other Greeks are in play, and sometimes the effects are additive and sometimes they offset each other (more on that in Part II).  

Repeated for clarification:  The Greeks don't do anything.  They don't make money.  They don't make positions risky.  Greeks allow you to measure risk.  the Greeks allow you to measure potential gains and losses.  They serve no other purpose.

When you measure risk, you have a choice.  You may live with the risk, or you may hedge that risk.  That's why the Greeks are essential for risk management.  When you measure a risk factor (delta, time decay, etc,) you can hedge, or reduce, that risk.  You can ignore the risk or offset all or part of that risk. 

When you trade stock, if you believe you are too long and uncomfortable with the risk, all you can do is sell some shares.

When you trade options, there are many reasonable alternatives to get 'less long.'  One choice is to sell positive deltas or by buy negative deltas.  And that does not mean you must buy or sell calls or puts.  You can hedge (adjust) the position (or portfolio) with any combination of options, including a kite spread.  Obviously some choices are more efficient to trade than others, but knowing how to hedge a position is one of those matters you learn from experience or by reading Options for Rookies.

When you understand how position Greeks translate into real money, you are well-placed to make important risk management decisions.  When the definitions of the various terms are merely a blur, you cannot function efficiently.

to be continued

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Is Owning Straddles Overnight Viable?

Mark,


I think the kite spread is a good idea, but a big gap, like the one I
highlighted, is still very damaging despite having the kite spread.

Of
course trading smaller size will help, but that will result in smaller
profit too.

I have another idea, not sure about its feasibility, but maybe you can
share some insights. How about buying a straddle at the end of the
session, then sell it back next day when market opens. Transaction fee
may be an issue here if I do this everyday, but let’s assume I only do
this when I think something big might happen, like earnings report.


Thanks.

John,

***


1) Smaller size:  The primary purpose of trading smaller size is to reduce risk.  And it’s the easiest, most convenient risk management tool.  too bad it’s used so infrequently.

In my opinion, ‘size’ is a crucial, risk-related decision that must be made for each trade.  Of course, we already ‘know’ our preferred size, so unless some change is being considered, this decision is already known at the time the trade is initiated.

2) A ‘big gap’ is usually very profitable when you are the owner of naked long options.  The only reason you may have a problem with it is that you are using one kite per 10 call spreads.  That’s not really enough to provide a gap profit. 

But is that your true goal?  A profit from an unexpected, unlikely event?  Wouldn’t it be more prudent to own a single kite as partial insurance?

These two figures show a 10-lot of call spreads protected by one, and then two kite spreads.

10_IC_+_one_kite

2_kites

Two kite spreads yields a profit on a 10% gap.  That is so unlikely that I cannot see how it’s worth the cost of buying two kites.


3) There are multiple problems with this play:

a) Daily commissions

b) Daily time decay:  Yes, holding a trade overnight results in time decay for the options.  See Adam Warner’s post for more on this.

c) Slippage.  You may not have to pay offers and sell bids, but every time you trade, you give up some value to the mid-point of the bid/ask spreads.

d) If you think you have any idea when ‘something big’ will happen, then all you have to do is quit trading, take advantage of your ability to predict such an occurrence, and position yourself for an occasional windfall.  That’s much easier than trading every day.

Earnings report?  Are you kidding me?  That’s when all the amateurs pay inflated prices for options.  That’s the time you don’t want to be buying options. See this post.

e) If you don’t do it every day, you will surely miss the terrorist attack, or the assassination, or the massive earthquake and tsunami that has a huge economic effect.  You will miss the out-of-the-blue discovery of a cancer cure.  In short, you know you cannot time the market, and more than that, the gap producing events are unexpected.  By definition you have no clue when one may occur.

654


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Position Size: A Matter of Life and Death (for a Trader)

Mark,

This is
what I've been considering (Conversation started earlier). I figure the kites provide great protection
if the Iron Condors don't behave, yet they reduce the premium of an IC
significantly.  The risk is minimal but so is the profit.

So if I exited both the kite and the 10-lot of Iron Condors at the same time – for say
only $300 profit, it wouldn't be enough for me. However, if I put on 10
times as many I would have approx $3000 profit ,which is more acceptable. Thoughts?

Joe


***

You may be too young to remember Lost in Space, a TV show from the mid-1960s, but one line from that show comes to mind:

Danger_will_robinson_

1) It requires 10k margin to do a 10-lot (of 10-point iron condors).

It requires 100k of available margin to increase size by 10 times and trade a 100-lot.

If you earn $300 when risking $10,000 that is no different from earning $3,000 when risking $100,000.

2) The risk graph looks nicer.  And it is nicer.  Perhaps it's 'nicer' by enough for you to move from 10 to 12 iron condors.  But to move to 100?  No way.

It is not that safe.  It is just safer.  And the final safety is going to depend on skills as a risk manager.  Do you have enough confidence in those skills to up position size by an order of magnitude?

3) I  hope that you are suggesting, or at least asking about, increasing position size by a factor of 10 because you are new to the options world. 

I would tremble at the thought of an experienced trader asking this question.

Increasing position size by anything except a small increment is fraught with danger.  First, you don't know how you will react if and when trouble looms.  Second, you may be risking almost your entire account on a single trade.  You just cannot do that and expect to survive. 

It's unlikely you would lose anything resembling the maximum 100k (yes, this is possible, depending on strikes chosen), but how can you afford to take that chance?  Would you be able to exit a trade to lock in a $20,000 loss if you judged the position too risky to hold?  If you cannot do that, you will become frozen and unable to take needed action.

4) Look at your risk graph the day prior to expiration.  Note how those kites have gone from a 'rescue plan' to a potential disaster.

I know you 'plan' to exit prior to expiration, but many times traders are just unwilling to pay the necessary cost to exit.

5) I agree that you may indeed do nicely with this concept.  But all it takes is one bad situation – guaranteed to occur (but who knows when?) and you may be permanently out of business.

Please do not do this.  If you get some practice with the 10-lots, and demonstrate a good ability to handle risk for a minimum of six months, then I would consider – and I mean consider (not automatically doing it), moving size up to where you buy two kites instead of one.  Under no circumstances can that be more than 20-lots of an IC, and I think that's too large of a jump in size.

One more point: When I said 'demonstrate ability to handle risk,' If you have six easy wins with no serious adjustment decisions, that does not count.  I am referring to situations in which you face serious decisions and make a good choice each time. I am referring to having the courage to do the right thing and not taking on too much risk just because you are frozen with indecision.  If you can do that a few times – then and only then can you consider yourself experienced enough to move up (gradually) in size.

652



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How Kite Spreads can Become Embedded Back Spreads

James and I have had a back and forth discussion regarding whether certain positions are back spreads.  The discussion began here and there's an interesting aspect that's worth consideration:

How can a kite spread – in which you own a limited number of long options (on top) turn into a position with back spread properties?

First, some definitions:

a) A kite spread is generally purchased as insurance when an iron condor or credit spread threatens to move into the money.  It's either a bullish position using calls, or a bearish position using puts.  It's constructed by buying one option (the kite string) and selling (usually) 3 or 4 farther OTM vertical spreads (the kite sail).  A more detailed description is available.

b) 'On top' means closer to the money.  It's a call option with a lower strike  than the options being protected.  Or it's a put option with a higher strike than the options it is protecting.

Example:  Please note:  These are randomly selected fictional trades, generated today, with RUT @ 675.  I don't have prices for these 'old' trades. The discussion involves the appearance of the portfolio, how it came to be constructed and says nothing about profitability.

Assume you sold 20 call spreads:  RUT Apr 650/660 when RUT was trading below 600. 

As RUT moved above 620, you became concerned about the position and decided to make an early adjustment (a Stage I adjustment). The trade you chose was to buy 2 RUT Apr 640; 670/680 kites [This is the C4 variety]

Adjustment I:

Buy 2 Apr 640 calls

Sell 8 Apr 670 calls

Buy 8 Apr 680 calls

You now own 2 Apr 640 calls and are short a total of 28 call spreads

The market continues to move higher, and when RUT passes 635, you are very uncomfortable with your position.  It's time (you decide) to get out of some of those 650 calls.  The simplest trade is to buy back a few of the Apr 650/660 [typo corrected] call spreads, but you decide to buy kite spreads instead.

You buy 5 Apr 650; 670/680 C3 kites.

Adjustment II:

Buy 5 Apr 650 calls (to close)

Sell 15 Apr 670 calls

Buy 15 Apr 680 calls

Comment:  Increasing position size is usually a poor choice.  The reason it's acceptable with a kite spread is that the adjustment trade (as a stand-alone position) adds no additional risk to the upside, other than the debit incurred when placing the trade.  It does provide plenty of upside profit potential when RUT is not near 680 at expiration.

When RUT moves past 640, one reasonable trade is to sell the 640/650 C spread.  This feels counterintuitive, especially when the upside is where risk lies and making the upside worse doesn't feel right.  But if you sell this spread between $6 and $6.50, the maximum loss is only $350 to $400 per spread and it does make the down side better.

The true rationale for selling the call spread is to use the proceeds to buy more kites, reducing my short position on the 650 line.

Adjustment III

Sell Apr 640/650 spread 2 times

Buy 3 more Apr 650; 670/680 kite spreads


The position now looks like this: [with errors corrected]

– 10 Apr 650 calls

+20 Apr 660 calls

-32 Apr 670 calls

+32 Apr 680 calls

James calls this a back spread and I'd prefer to describe this position as one that contains a back spread within.  The characteristic that gives this backspread-like properties is the fact that the extra long options are no longer 'on top.'  The long option is the April 660 call.

To completely eliminate backspread characteristics, there are alternatives:

a) Buy 5 Apr 650; 670/680 C3 kite spreads.  My preferred choice

c) Buy 5 Apr 650/660 C spreads. Perhaps sell one extra Apr 660 call to offset the cost cost, but only if the risk graph and your comfort zone allow that trade.  I see no good reason to make this trade

c) There is no necessity to make these trades, but if looking at the 'backspread' portion of the position is uncomfortable (too much negative theta), you can take steps to alter the position

That's how kite spreads can turn into positions that resemble back spreads.  And the process continues.  With RUT currently trading near 675, it's likely that anyone holding this position would have repurchased many of the 670 calls as part of a kite that sold more 690/700 spreads.

637


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Adjusting a Near-Term ITM Iron Condor

Mark,

This is my first time here. its great to find someone with good knowledge willing to answer questions. Thanks

I have some March IC's on SPY (trading approximately 114) in trouble. 112-116 top spread.
Have adjusted by adding some March19/March31 115 calendars which gives
some limited upside protection.

Can the kite spread help protect this situation? Is it too close to
expiration? I tried different strikes and months on risk graph. Can you
suggest certain strikes and months?

***


Welcome to Options for Rookies.

1) Although adjusting with calendars is attractive, and is recommended by many, I don't like them.

a) The calendar is long vega, and unless you specifically want to add positive vega to your portfolio, I suggest avoiding calendars as protection.  Trading them as stand alone positions is a different situation.

b) Calendars have little value as insurance.  Sure they help when the market moves towards the strike – as has happened here.  But if SPY moves much higher, you not only lose more money on your iron condors, but the calendar spread also loses value.  It's very limited in its ability to help your overall risk/reward structure.

2) Each investor must choose a risk management style that works for him/her.  In my opinion, waiting until the underlying is halfway between your long and short strike prices is waiting too long.  But that's my opinion.  I'm not suggesting you did anything wrong.

3) A kite spread always helps because it adds a net long option – and that single option can play a big role in cutting losses

However, the kite spread is a relatively costly insurance policy and may lose its effectiveness as expiration approaches.  That occurs when the underlying is priced near your maximum loss (116 in this example).  That combination makes kites inappropriate for your situation.  You can buy an April kite.  That will show a decent profit on a continued rally, but you can use some March gamma, not April.

For best effectiveness, the long option in the kite (long one call; short 3 or 4 farther OTM call spreads) should be on top – that means it has a strike price lower than your short call (or higher than your short put).  In this example, I'd want to own the March 110 or 111 call as part of the kite, and it's too late for that.

But, there are always other choices.

4) You need some upside protection for this position.  To me, the best alternatives, in my recommended sequence are

a) Buy a small number of March calls.  110s, 111's or 112s.  You need quantity here, and I recommend more 112s rather than fewer 110s.

b) Cover some 112/116 C spreads

c) Buy 112/114, or perhaps 113/115 call spreads

d) Cover the whole position and call it a day

5) Not every iron condor position can be salvaged.  This a strategy in which losses are inevitable, and your main task is to minimize those losses.

6) Sometimes it's a good idea to buy a small amount of protection early.  That's the appropriate time for a kite spread.

636

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Iron Condor Position, Protected by a Kite Spreads II

Last time, we began the discussion of how to work with a 20-lot iron condor position that was protected by three kite spreads.

We owned 3 RUT Apr 650 calls and were short 29 Apr 670/680 call spreads and the discussion now moves towards the need to make an adjustment.

The risk graph doesn't look bad.  There's not much to lose – as things stand today.  But as the days pass, risk increases when RUT is near, and especially above, 670.  See Part I for a more detailed discussion.

Adjustments

When working with kite spreads, there is the temptation to do nothing because the risk graph looks so reasonable.  The passage of time changes the picture drastically, and the prudent kite user adjusts in advance.

I like to use several different adjustment types, and I've decided to combine three of them for  consideration.  These are not specifically recommended, but may give you an idea that you had not previously considered.

1a) Sell your long options.  They are probably costly options and they served their purpose.

1b) Replace those calls.  My most common play is to roll them by one strike.  That means buy 660s and sell 650s.  My idea of the right time to do this is when I can collect between $6 and $6.50 for the spread.  This play is not as good when you still hold this position very near expiration.

1c) In today's example, I went further.  The first adjustment is to sell 3 RUT Apr 650s and buy 6 Apr 670s.  One reason is that I prefer to own the three extra options.  The second is that it's time to begin to exit the 670/680 call spread.  And this is a start.

2) More kite spreads to provide better upside.  Buy 3 Apr 670 calls and sell 9 Apr 690/700 spreads.  These kites cost roughly $500 apiece. 

If spending that $1,500 makes you uncomfortable, you have an alternative.  Choose 1b above, instead of 1c.  Use that $1,800 to $1,900 to pay for the kites.  You may even decide to splurge and buy a fourth kite instead of only three.

3) I avoid increasing position size as a general rule.  But when I now own 6 extra long calls (instead of 3), I believe the risk/reward allows for owning a larger position.

Buy back 10 Apr 670/680 call spreads and sell 20 Apr 690/700 call spreads.  At current prices, this should cost about $80 per spread.

If you choose all three trades, the risk plot looks like this:

6_x_3;_10_x_20;_3_x_9
Dark blue = today

Light blue = 1 day before expiration

It's important to do your own graphs and consider any adjustments you want to make.

To me, I can live with the position more easily than the unadjusted position.   Please remember, these three trade ideas are not all-or-none.  But they should provide food for thought.   Draw those graphs and analyze alternatives.

633


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Iron Condor Position, Protected by Kite Spreads

Mark,

I don't know what your positions are exactly, but let's say you
have a few kite spreads of 650/670/680 and most of your credit spreads
are at 670/680.

If RUT continues its march upwards near 670, the kite
spread hasn't reached its full potential yet (I'm not considering at
expiration – assuming there's like 30 days left). Do you plan to roll
the 670/680 position, buy back the credit spreads, or what?

In general,
what is the plan with purchasing kite spreads with strikes near
the strike you are already short?

Thanks,

Peter

***

Good question.  

In general, the kite affords protection, and I may be in (a little) less hurry to make an adjustment.  But I still adjust as I would without the insurance policy.  The kite allows flexibility, and I find that I make adjustments that were previously not a consideration.  The kite allows me to do that comfortably.

Yesterday's post explained how kiting the kite (adding a kite spread to a kite spread) represents a sound risk management technique than can provide significant profit potential when the market moves against the original iron condor position.

That post looked at the kite in isolation.  This time, let's look at it in conjunction with an existing iron condor position.

Assume:

April expiration is 42 days in the future

Short 20  RUT Apr 670/680 call spreads as part of an iron condor

Own 3 RUT Apr 650 C3 kite spreads;

+3 Apr 650 calls; and -9 Apr 670/680 call spreads

Total position:

+3 Apr 650 calls

-29 Apr 670/680 call spreads

42d

The position is short delta.  Today, the maximum loss is less than $2,500 and occurs near 690.  As time passes, the two plots merge.  The lighter blue dots represents the position with only one day remaining in the lifetime of the options.  On Apr 16, the settlement price is determined at the opening of trading.

This  position is too risky to hold that long, but it's instructive to see how the position behaves.  As time passes, the two risk graphs merge.  There is far more risk with RUT above 670 later in the game, than there is today.

Let's pause in this analysis to discuss why that is true.

If the market reverses direction, risk is reduced and previous losses are reduced or eliminated.  Thus, let's consider the position as the market rises.

The first problem is that the value of the 670/680 spread increases.  To offset that, the 3 lots of Apr 650 calls pick up value.

At the present time, with 6 weeks remaining before expiration, there is substantial time value in the 650 calls that you own.  As time passes, theta does what it does and the time premium in the option becomes less than it is today.  Thus, time is not on your side.

Of course we are also subject to the whims of a change in the implied volatility of the options, but most of the time, IV is not making big changes from week to week.  Discussing each possible scenario converts a blog post into a book, so we'll ignore IV changes.

Now, lets look at the effect of time on the 670/680 call spread.  When RUT is well below 670, the spread heads slowly towards zero.  That's good.  But that's not the area of concern.  If you own this trade when RUT is near 660 there is plenty of opportunity to exit and eliminate the ever-increasing risk.

Once again, let's only concern ourselves with the upside.  Above 680, the spread is still trading with significant time premium (today).  Thus, the value of the spread increases towards it's maximum value of $10, but it moves slowly.  And slowly is the point. 

The increase in the value of the 20 spreads is almost offset by the increase in the value of your 3-lot of long calls.  In fact, on a huge upwards move, this position earns a good profit, regardless of when it occurs.

But – there's always a 'but' – as time passes, not only does the time premium in your long call disappear, but so does the time premium in the call spread.  In other words, above 680, the spread quickly moves to $10.  Double whammy as time passes – the calls lose and the call spread loses. 

That's the reason it's so difficult to hold this position near expiration.  Risk is simply too large (for most of us).  This is clearly apparent in the light blue graph.  Late in the game, the portfolio value moves form +10k to -15k as RUT rallies from 670 to 680.

Thus, a market rise is fine now, but becomes a danger later.

Back to the question: Should you adjust now, making it safer later on – or is it okay to hold because risk is well under control for the immediate future.

As usual, I have no definitive answer.  Each of you must find his/her individual comfort zone.  But I prefer to adjust.  


to be continued… Is this position okay as is, or is an adjustment advisable?

631


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and conservative came through loudly and clearly.  It is one of the
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