I know you have a preference for sticking to a select
few indices versus trading a wide breadth of underlyings – something
I've learned the hard way works better for myself as well.
I do notice
that many of the discussions both on blogs and in the books I've read
often talk about managing individual positions, as opposed to just
managing your greeks as a book. I've generally found it much easier to
manage my positions by looking at my greeks (both on a month by month
break down and total breakdown) when I have multiple positions in the
same underlying than tracking each individual trade.
Are there any
dangers and pitfalls to my current approach? I'm not sure if I'm being
lazy and this may be one of those "whole is greater then the sum of its
parts situations". I trade primarily European style index options, so I
don't worry about being exercised if a strike is breached (as long as I'm
comfortable with my overall delta/gamma/vega).
Yes, there is a danger. At some point, bad positions should be closed
and new, better, safer positions opened to replace them.
When the strike is breached (or prior to that if you get uncomfortable
with the specific option being so 'dangerous') you cannot sit by and
watch this spread move to its maximum value. Sure you can wait longer
than you would if this were your only position, but at some point, you
should do something. Buy extras, roll, exit and take the loss – some
good adjustment is needed. Exception: If you want to gamble
(ill-advised IMHO), or if you are so sure the market will reverse
direction that you want to take the chance, it's your money.
Yes, your total deltas are fine. Yes, it appears that losses are
minimal. But pay attention to that gamma. It is not your friend.
I thought the same thing in the past, and noticed that those ITM
spreads result in larger losses than expected – even with insurance in
place. I now exit (with or without rolling) – and sell out some
profitable insurance at the same time: that insurance is no longer
needed and I replace it with a new, less expensive kite (or other)
Yes Jason, there is more risk than is readily apparent. You can take
more time and not panic – but you should find a way to handle those
really bad positions.
You are never 'exercised.' You are 'assigned' as in 'assigned an exercise notice.'
Never be concerned with being assigned when the 'strike is breached.' Early exercise only occurs when an option is deep in the money and there is no residual time premium. Unless there is a dividend to collect, exercising a call option any earlier than expiration, is a usually serious mistake by the option owner.