MSFT mock delta neutral trade (short straddle)

[Andy_Trade]

I'm going to post several mocks in their own separate threads as advised by another poster. Please critique them and any advice is appreciated.

MSFT Short Straddle Delta Neutral entered on 10/22/07. MSFT @ 30.55

Sold 6 30 Calls @ 1.25 Delta .54 = +324
Sold 7 30 Puts @ .73 Delta -.46 = -322

Delta is +2 (supposed to be -2 for my trade)

10/23

MSFT closed @ 30.90

Delta of calls .60 x 600 = +360
Delta of puts -.40 x 700 = -280

Delta is +80 (or so I thought) so I decided to "neutralize" my trade by shorting 80 shares of MSFT @ 30.85.

Position:

6 30 calls 1.25 - 1.53 = -168 loss
7 30 puts .73 - .62 = +77 gain
80 short 30.85 - 30.90 = -4 loss.

-168 + 77 - 4 = -95 unrealized loss.

10/24

MSFT closed @ 31.25

While trading @ 31.03 the deltas were as follows:

6 calls .65 = +390
7 puts x -.35 = -245
80 MSFT short = -80

390 - 245 - 80 = +65 delta (or so I thought) so I decided to "neutralize" by buying a 32.50 put @ 1.88 with a delta of -.73, leaving a delta of -8, so I bought back 8 shares of the shorted MSFT @ 31.05.

So I'm thinking my delta is 0 when it's actually -290 EGAD! :eek:

As for the position:

6 30 calls 1.25 - 1.81 = -336 loss
7 30 puts .73 - .52 = +147 gain
72 short MSFT 30.85 - 30.98 = 1.04 loss
1 32.50 put (long) 1.88 - 1.83 = -5 loss

-336 + 147 - 28.80 - 5 = -222.80 unrealized loss

10/25

MSFT closes @ 31.99

I realize my error and see that the delta now is actually -348

So I bought back the 72 shares @ 31.79 to gain 72 delta. I sold the long 32.50 put I had @ 1.31 for a delta gain of 66. Then I sold 7 more 30 puts now @ .35 with a delta of -.30 so I gained 210 delta.

-348 + 72 + 66 + 210 = 0 Finally the delta is actually neutralized.

Position:

6 30 calls @ 1.25 - 2.30 = -630 loss
7 30 puts @ .73 - .31 = +294 gain
7 30 puts @ .35 - .31 = +28 gain

-630 + 294 + 28 = -308 Unrealized loss.

Realized loss of 67.68 on 72 shares.
Realized loss of 1.04 on 8 shares.
Realized loss of 57 on 32.50 put.

67.68 + 1.04 + 57 = -125.74 Realized loss.

10/26/07

Here's where things really get ugly. I should have kept in mind the deal with Facebook that MSFT just got...DOH!

MSFT gaps up and trades up to about 36 then closes @ 35.03

I decided to cut my losses and get out of this painful trade.

I bought back the calls @ 4.90 for a loss of 2,190. Bought back the 14 puts @ .03 for a gain of 714.

-2,190 +714 - 125.74 = -1,601.74 loss on what was supposed to be a DN short straddle.

 

[Andy_Trade]

Quote from ajna:

The best advice I received in trading was to look at my positions every day and decide if the current price is one that I would enter at now. If so then continue with the current trade. If not, then adjust or exit.

With that said:
1) Why did you enter the short straddles to begin with? Short vol, distro play, etc.

2) Why did you adjust as you did? Certain delta or price level, or some other reason?

Thanks for your input, ajna.

1) I entered the short straddle on MSFT out of ignorance of the earnings report and disregarding the implications of a deal with facebook. MSFT hasn't jumped like this in a long time. I feel kind of lucky that I didn't lose more. Should've taken a long straddle considering the facebook deal and earnings report. The short strangle is the strategy I understand the most and have seen other's do mock delta neutral trades with it so I want to try that one first. I'll be putting on some new types of trades next week.

As for WYNN, I wanted to do a short strangle on it after seeing the big loss it took earlier this month, as the China resort came up short about 20% of the ananlysts expectations. I don't think WYNN will continue to plummet, but I don't expect too big of a move either. Although it did rise in price, I don't see it going much higher even with the earnings report coming up. I don't expect the report to be so dismal with the China situation that it will take a nose dive, so I'm thinking about neutralizing by buying back half of my calls. I'm neutral to slightly bullish and slightly bearish but I think the strikes are far enough away that I'll be okay.
But I definately have more of a cushion on the downside so that's why I want to reduce the call side. Or I could buy back 1 170 call and sell 2 more 140 puts.

2) The reason I adjusted was just to stay as neutral as possible since I just want to profit from as much time decay as possible. But of course I messed up the delta entirely. I need to figure out a more mechanical way of adjusting with rules. I've tried to find any literature that I can on the subject but I haven't had much luck finding any.