Q & A My Personal Risk Management


Hi Mark,

Would you consider a post/ overview/ narrative on specific delta,
gamma, theta and vega numbers/ thoughts you personally consider while managing
your RUT portfolio?

REALLY enjoy your blog!

Dave

***

I cannot comply with your specific request because different situations require different solutions.  But I made a trade yesterday – reported on twitter:

"Locked in a gain;
kept insurance, by adjusting: SOLD RUT SEP 570P that I BOT earlier and
replaced them with RUT Sep 550P. +$10.30 per spread"

This is an appropriate time to discuss the rationale for the trade.  If it proves useful, I will do it whenever I have something interesting to report.


Part of my RUT September position: 

RUT is currently 557

Short:  RUT Sep 530/540 Put spreads

Long:  A few RUT Sep 570 puts as insurance

My thoughts and trade rationale:

"I'm holding onto my September iron condor positions right now.  I've already covered a few of the far OTM call spreads at 10 cents per spread and am not yet ready to cover any more spreads (RUT Sep 610/620 C) – at current prices.

The 530/540 put spreads are not that far OTM and may soon present a problem, but overall my portfolio is well protected, there is no reason to consider making a risk-reducing adjustment, and I don't want to pay the current price (> $2.00) to cover this spread.

The Sep 570 puts provide adequate protection right now.  In addition, I own other puts that provide additional insurance, but that's not relevant to the trade under discussion.

One of the difficulties when buying insurance is that the trades are made at a debit, and if all positions expire worthless, the month will be profitable, but the cost of insurance reduces those profits.  For some traders, the idea of paying cash for insurance is abhorrent because their entire philosophy is based on selling – not buying – premium.  With that in mind, I believe it's prudent to look for opportunities to recover some, or all of the cost of insurance – as long as portfolio protection is not forfeited.

My favored method for accomplishing that goal is to roll down the options held for protection – and to collect a decent lump of cash.  Thus, I entered an order to sell the Sep 570 puts and to buy an equal number of 550 puts.  I might have chosen to buy the 560 puts, but I prefer to collect additional cash. 

For this trade, I'm ignoring all the Greeks.  This trade is obviously going to make my position longer (selling negative delta), but because I still own excellent protection and because I want to take some cash off the table, I feel that it is more important to satisfy those criteria than to be concerned with a small number of deltas. The overall portfolio does not have downside risk.

I sold the RUT Sep 550/570 put spread and collected $10.30 per spread.  Is that a good trade?  That's not the question.  This trade accomplished something good for the portfolio – and that makes it 'good' by my definition:

a) I have $1,030 cash per spread

b) I still own protection against a disaster in the form of puts with a higher strike price than my short puts.  To me, that's important.

c) This trade is equivalent to gamma scalping where a trader buys dips and sells rallies. [Using this method, I recently sold the RUT Sep 580/600 call spread at $10.20]

So what's the downside?  What was lost?  Answer:  If the market tumbles, this spread could be worth $2,000 and I sold it for half that amount.  In other words, in a disaster – where protection is needed – I've given up an additional $970 payout from my insurance policy, per spread.  But, to me, it's not the $970 that I need.  Owning extra puts is what is needed for insurance.  I'm perfectly willing (for the right price) to trade in my 570 puts for 550 puts.

What's next:

I must still watch this position because it may require an adjustment.  If the market moves much lower, I will do something with the 530/540 put spreads.  At the same time, I'll sell out my insurance (the 550 puts).  Right now, I'm holding, looking for additional profit opportunities."

437

2 Responses to Q & A My Personal Risk Management

  1. Dave 09/03/2009 at 11:09 PM #

    Thanks soooo much for sharing your thoughts/ rationale. I’ve enjoyed your book (also referring many traders to it) and read your blog religiously… but this r-e-a-l-l-y helps.
    I trade a couple accounts that are stock/ option combos– stuff comes and goes and to be honest I don’t really study the greeks too hard with them. But another account is solely iron condors and in that one I’m trying hard to get a feel for proper “greek management”. I suspect I am over insured. If I remove the insurance from this account all IC’s (assorted strikes and expirations) combined look something like this:
    Delta -10.13
    Gamma -0.99
    Theta 37.10
    Vega -73.55
    Yes, everyone’s comfort zone is individual… but if these were numbers in your account how would you be looking at them?

  2. Mark Wolfinger 09/04/2009 at 7:27 AM #

    Thanks for the kind words (and referrals).
    Those Greeks are essentially zero. To me they indicate an IC portfolio that is as neutral as you can be with an IC mix. I would look at them without concern.
    There is one danger than the deltas do not indicate. The fact that your gamma is so low tells me this does not apply to you. But for others:
    It’s possible that you have one IC in which the call side is very nearly ITM and another in which the put side is very nearly ITM. In other words, you could easily have two (individually very risky) positions for which the long deltas of one are offsetting the short deltas of another. Assuming that is not the case, those Greeks would leave me worry free (for now).
    Here’s something that may not be readily obvious: When one side of an iron condor moves ITM – especially near expiration – it may be best to exit, ignoring the fact that it is protected with extra long options. But simultaneously sell some or all of the insurance that was protecting the position.
    Why? Because holding an ITM IC into expiration can result in rapid losses as the $5 or $6 spread quickly moves to $10 – at the same time that your protection loses time premium. A double whammy. True, the risk graph looks great if there is a substantial move in the price of the underlying – but think about the scenario with little movement and both the IC and the extra long options move against you at the same time. Ouch.
    To tell the truth, right now I am also over-insured.