Quote from Eric99:
Mark,
From your last post, how do you add more call diagonals as the market rallys? In the past you've said you try to stay delta neutral (somewhat). That would seem to require adding put diags as the market rallys.
As always, thanks for sharing.
Eric,
When the market ralles my DD portfolio becomes delta negative. But only for awhile, as I own extra calls. (Sadly, I do not own extra puts to protect the downside.)
I treat put and call positions differently and independentlly. For reasons explained below, I make no attempt to stay delta neutral.
One of the benefits of the rally is that my put spreads do well because they are delta positive. That means they become more and more profitable. At some point I close those put positions. That occurs when when the credit available for closing the position becomes attractive, or when the delta for a specific spread gets to zero, or when I simply prefer to redeploy the margin elsewhere. It's easy to make these trades, as each one is quite profitable. I don't pay any attention to how profitable or what percentage return I have earned. I open each spread for a cash credit; I close for an additional cash credit; and the profit is whatever it is.
As I close the put positions, my portfolio becomes even more unbalanced, as it then contains a large excess of call spreads over put spreads. I do not let that deter me. I still open new call spreads - usually at strike prices that are higher than my current positions. But, sometimes I simply add to current positions.
I fully understand that this method leaves me exposed to a big loss should the rally continue. However, although I do not predict market direction, I see no compelling reason for a huge rally and am willing to continue to sell call spreads.
If the upside continues, then my risk management personna takes over. By owning some positive curvature, thanks to the extra calls, upside losses are limited, and at some point, my gamma turns positive and further upside would no longer be painful. But, I still manage each spread separately. If the strike is breached and IF I lack curvature near that strike, then I take the loss by closing the position. I usually open a new position at a still higher strike price (similar to rolling a position, but I do not look at the trade that way).
I find this works very well - but I recognize that if the market were to take a huge, sustained move, it would not work so well.
On declines, I close call spreads and open new put spreads in a similar manner. But, without any protective curvature. And because I lack that curvature, I am not as aggressive in selling new put spreads on declines. I still sell, but I sell more call spreads on rallies than I do put spreads on declines.
Why not delta neutral: When market rallies and I am exposed to losses on the upside, selling some extra put spreads for additional cash credits may seem to provide some upside protection. And it does. But, it's minimal. It's a very poor way to 'adjust' a portfolio when the market is moving strongly in one direction. I do not want to jeopardaize my overall portfolio - in case the market reverses direction - merely to take in a few extra dollars in put premium. Thus, I stay delta short and sell puts when it becomes attractive for me to do so. That occurs when I can obtain sufficient credits for selling spreads that meet my flexible criteria. I prefer to sell options that are reasonably OTM - perhaps 6-7% - and do not want to be forced into selling put spreads that are nearer to the money in an attempt to raise extra cash to protect the upside.
What works for me is not suitable for everyone - especially those who time their exits and entries.
Mark
