Short post here about a trade that I made in AAPL today. I had a short setup on the hourly chart so I looked for a good option structure to trade. Here’s my tweet describing why I chose a Diagonal spread. The Put that I was selling was much more expensive than the one that I was buying. Just exactly what I was looking for! Actually, that’s what everybody should be looking for!!
Once the trade was placed it was just a matter of time to see if price would ‘accommodate’ me by moving lower and giving me a chance to Delta Hedge (DH) my trade. A Delta Hedge is simply a method of reducing a position’s Delta (directional) risk by reducing it’s cost. It’s very simple to DH a Diagonal spread into a Calendar spread by selling a Vertical spread!
Below are the fills. At 11:24 I bot a 10-lot $15 wide Diagonal spread for $3.95 each ($3,950) and at 15:37 I sold a 10-lot Vertical spread for $4.55 each ($4,550). That’s a total of 253 minutes of initial risk and after all trades had been made I owned a Calendar spread for a $.60 CREDIT each (a minimum $600 profit)
Below is the current risk profile.
Hopefully you can see why Delta Hedging a trade is more appealing to me than just scalping a small profit. If I had wanted to exit the position instead of DH’ing it this afternoon I could’ve done so with about a $1,000 profit. Instead, I locked-in a $600 profit and still have the opportunity to make an additional $3,000 or so.
Here’s the most important takeaway from this post: I only need a relatively small price move in an instrument in order to reduce or eliminate the initial risk in a position. Why would I carry the full risk over a longer period of time if I can reduce risk and still have a position that can return a potentially large profit?
That’s all. Ask questions below or tweet at me @VegaOptions.
so can i say that other bearish options you may have considered here were a 1) call credit spread 2) put debit spread or 3) buying a put?
Yes, any of those strategies can be used as long as, in the case of the credit or debit spread, the spread is wide enough to be able to ‘roll’ one side of the spread to create a credit for the purpose of reducing initial risk, both dollar and Delta. Buying a Put instead of a spread is the more aggressive trade since it’s un-hedged but you can choose how much initial risk you want to take by carefully selecting the Delta value. Whenever possible, sell a more expensive option and buy a cheaper one when initiating a new trade!!!