I often refer to building a position rather than making a trade. Sometimes a trade is just a trade and sometimes it’s the cornerstone of a new structure. The particular position I’m about to discuss has components of both a trade and the building of a larger position. I hope you’ll find it useful.
On 12/2/2021 I bot a single Mar18 SPX 4600 Call for $183.00. Was that to be a trade or the beginning of a new and larger position? I typically start out with the intention of building a larger position but one has to always be flexible when trading options and so it’s what the price action does after the trade is made that determines it’s future. Below is the list of all fills that I’ve had in the Mar18 SPX position and, below that, I’ll walk you through how the position has evolved and what it look’s like now.
So that’s all the trades I’ve made in the current position. Now I’ll show you how the position was constructed. Trade #1 occurred soon after the open on 12/6 and I simply bought one Call to establish a bullish position. I won’t get into the chart setup that led me to believe that SPX would be going higher but suffice it to say that I was looking for a rally and wanted to start with a partial-size position. Below is the risk profile for that single call. One thing I’d like you to consider before I move on is what the current profit on that Call would be if I was still holding that same position today. I would have $18,300 of risk and my open profit/loss would be a $147 loss.
Trade #2 took place about a hour after trade #1 as SPX moved higher and I got confirmation of the ‘breakout’ that I was anticipating. I was now long 3 contracts with a cost basis of just over $57,000.
To be clear that is pushing the upper boundary of the amount of risk that I’m comfortable carrying at any one time in a single position. That meant that (1) I would be looking to start reducing my risk on this position very quickly and (2) there is no way I’d carry that amount of un-hedged risk overnight. Since you now understand my mindset you’ll appreciate what I did next.
Trade #3 happened prior to the end of day when I sold 1 of the 3 contracts in the part of this position that was simply a trade. I bought the Call for $183.00 in the morning and sold it for $200.50 in the afternoon which netted a profit of $1,750. That sale also reduced my net risk on the position I was still holding overnight to just over $37,000 which was back inside my comfort range.
SPX opened higher the next morning and so, within almost exactly 24 hours of my original trade, I sold 2 Mar18 SPX 4700 Calls for $161.00 each. That was trade #4.
The Calls that I originally bought were the 4600 strike and so now I owned 2 Vertical Call spreads that were $100 wide. I paid $194.90 for the 4600 Calls and sold the 4700 Calls for $161.00 so my net cost in the 4600/4700 Call spreads was $33.90. That took my cost in the open position down to $6,780. I was still in a bullish trade but I was now risking less than 15% of the max risk that I had taken in the trade the prior day. I’m always working towards reducing my risk in any position that I’m holding. In fact, as you’ll see if you keep reading, I was able to lock-in a small profit on this position while still holding it for more potential gains.
Trade #5 happened later in the day on 12/7. This was still just the second day of building this position. I sold a 4-lot of a $50 wide Call Credit spread for $16.95 each. That brought in $6,780 in premium and turned the position into an Unbalanced Broken Wing Condor. If that $6,780 amount looks familiar it should. That was exactly the remaining cost in the open position! In other words I was now holding a position with a potential $20,000 profit and a net cost of $0. Zero dollar cost as in Nada, Zilch, Nothing (you get the idea). On the risk profile below you’ll see the minimum profit is actually $1,750 and the maximum profit is $21,750. That’s because we can’t forget the $1,750 profit ‘scalp’ that I did on day 1 of the position.
Before we move on to the final trade in this position, look at the above risk profile one more time. I want you to notice the open profit and the Delta risk. The open profit was $11,000 and the Delta risk was .69 which, if I remember my grade school math correctly, is less than 1. A Delta risk of 1 is basically no Delta risk at all. That means that regardless of what the price of SPX does over the next week or two (or three) the open profit won’t change much. I’ve essentially temporarily locked-in that $11,000 profit. Well, what if I don’t want to lock-in that profit yet? What if I want more? What if I have a directional opinion on SPX and I’d like to express it in this position? I took a small step in that direction yesterday (1/7). In trade #6 I bought back 1 of the 4 Call Vertical Credit spreads that I had sold exactly one month ago. I sold the spread for $16.95 and bought it back for $11.00 which generated a small profit. More importantly, it added some positive Deltas to the position and opened up the potential profit if SPX price rallies beyond 4950 prior to Mar18.
So this is the current position after those 6 trades. I can do no worse than make a $650 profit and I can do no better than make a $20,650 profit. You will not ever hear me say that this is a no risk position. There is no such thing as a no risk position! It’s true that the worst I can do is make a profit but I’m only guaranteed a $650 profit and my current open profit is $10,905 so I can lose $10,255 of my current profit by Mar18 if SPX is below 4600. If that’s not risk then I don’t understand the meaning of risk. The risk that I have eliminated is my initial risk in the trade and that’s all well and good but my concern now is my current and future risk.
Early on in this post, when I first discussed the initial trade that I made when I bought the Mar18 SPX 4600 Call, I wrote, “if I was still holding that same position today I would have $18,300 of risk and my open profit/loss would be a $147 loss.” Instead, I have $10,255 of risk and my open profit is $10,905. Reducing cost/risk allows me to adjust my Delta (directional) risk, increases my Theta, allows me to reduce or even eliminate all initial risk and frees up risk capital to be deployed elsewhere.
If you have any questions or comments you can post them down below this post.