Easy Money…Not!

As this post brings the Vega Options blog one post closer to it’s 100th I realize how hard it is to reach most people and traders are certainly a special breed of people. Many are simply gamblers looking to make huge profits the easy way. What could be easier than buying a bunch of Calls or Puts and waiting for the money to roll in? Easy Peasy! Maybe so but I’ve been watching some videos from a YouTuber with over 100K subscribers and it wasn’t so easy for him! Now, before I go any further, I want to make it clear that what I’m writing here is not intended to mock this person nor am I taking any joy in his losses! At least he has the fortitude to post his actual results and own up to the fact that he is struggling in this market environment. This current environment is crushing many traders who thought all you needed to do was buy Calls and cash checks! That’s been working for years and so they never learned how to properly manage risk and now they don’t know what to do. Many will or have already blown up their accounts. Below is the YouTuber’s performance as of May 1st, 2022.

Below are some of his positions and you may notice that they are all Call options, not a Put anywhere in sight!

So the obvious cause of his poor performance is due to the fact that he has only Calls in his portfolio and the market has been going down lately, right? Well, if we’re going under the assumption that in the current market Calls are bad, Puts are good then what explains my Jun17 Call position below?

That Jun17 Call Condor has a minimum profit of $10,100 locked-in with a maximum potential profit of $65,100 and a current open profit of over $23,000. How is that possible with SPX closing yesterday at it’s lowest level in over a year? It’s possible due to a technique that is discussed extensively throughout this blog known as Delta Hedging. My current longer term price bias for SPX (based only on my personal chart analysis of the price action) is for price to move even lower. If that’s the case I should exit that June Call Condor and realize that $23,000 profit, right? Not gonna happen! First, it’s entirely possible that SPX just made a significant low yesterday (or any other day) and so my bias could change to expecting higher prices soon. So what to do? With my current bias for lower prices I kept the Call Condor and I’ve been adding short SPX Deltas by utilizing Diagonal spreads. Below is my entire current position consisting of 2 expiry’s; Jun17 for the long Delta position and May27 for the short Delta positions. The total open profit for all positions in my SPX portfolio is $44,000 with a maximum potential profit of over $500K.

In the following two risk profiles below I’m showing each of the two components of the May31/May27 position so you can see how each one contributes to the overall Greeks. First is the short Call Diagonal spread. This structure adds immediate Theta and is relatively Delta neutral. It generates a good amount of Theta at the current SPX price level. Since this trade was initiated for a Credit there is no possibility of loss if price goes lower. If SPX does move lower this position will actually become long Delta which could be very good as, at some point, SPX is likely to rally strongly!

Second is Put Diagonal spread designed to profit if SPX moves towards the target I’ve set based on the 78.6% retracement of last year’s price range. This is a more directional trade that needs SPX to move lower for it to be profitable.

So to summarize my current position I’m short SPX Deltas and long Theta so that even if SPX doesn’t move lower I will make additional profits. But what if SPX moves higher? The recent rally’s have been very strong even though SPX has been moving lower overall. Below is what my risk profile would look like if I made one simple adjustment; I could turn the position’s Deltas positive by simple buying a 5-lot of SPX Calls. One click and my portfolio is protected against a move higher. If SPX does rally but then runs into resistance where I’d expect it to turn down again would I exit that 5-lot of July Calls? Nope! I’d Delta Hedge those Calls by selling further OTM July Calls at a higher price and would be in the process of building another bullish position similar to the June Condor. I’m constantly building larger positions with smaller amounts of risk!

As per usual, there is often more than one way to Delta Hedge a position. In the above risk profile I would be adding risk capital to the position to reduce the Delta risk. I could just as well reduce the capital risk in order to reduce the Delta risk. I could accomplish that by selling the $10-wide Vertical spread that is imbedded in the $10-wide Diagonal spread that I currently own. That would generate a credit of $2.15 (as of Friday’s closing price) so, on a 100-lot position, that would reduce my capital investment by $21,500. That adjustment is shown on the risk profile below. As you can see, even with that adjustment I would still be short Deltas but by a much smaller amount. If I wanted to actually get long Deltas I would need to buy just 2 of the July Calls instead of 5 in the above profile.

As mentioned throughout this blog, there is a structure as to how I Delta Hedge my trades. Below is a list of the fills that I recently had in establishing a total of a 20-lot of May 9/May6 Put Diagonal spreads. I typically post or tweet my fills so that you can have confidence that what I’m demonstrating is not theoretical trades but rather actual trades that I make for my own account. Also, understand I do not make recommendations of specific trades to anyone! I show you what I do in my account and what you do with that information is entirely your responsibility!

Above were the fills in initiating and Delta Hedging those initial trades and below are the fills I got yesterday in closing out the positions.

If you look closely at both of the fill tables above you’ll see that I bought Put Diagonals, rolled them down to Put Calendars but I sold Call Calendars to close the position. What is going on there? Well, I actually took advantage of some inefficiencies in the SPX options market pricing to pocket $600 (less commissions) on the day before I exited the position. I simply converted the Put Calendars to Call Calendars as shown in the fill table below.

Theoretically there shouldn’t be a difference in the price between a Put Calendar and a Call Calendar if the expiry’s are the same, right? Theoretically is the key word there. Once I own a Put Calendar it doesn’t hurt to rest an order to flip it over to Calls if I can collect a big enough Credit to more than offset the commission to make that trade. That’s a little bit of risk-free arbitrage! Pro tip: if the market offers you free money, take it! Also, based on the chart analysis I thought it more likely that $SPX would be below 4150 than above at Friday’s close and it’s typically easier to get a fair price on buying and selling OTM options than ITM options, especially if they are deep ITM.

Finally, below I’ve put all of those trades on a spreadsheet so that you can see and hopefully understand the process I go through. First, I go risk on based on what I view as a good entry point from the price chart. There are many examples of my price action analysis on the blog and twitter feed. Then, after I’ve initiated a new position, I begin to place orders to Delta Hedge that position at areas of significant support or resistance on the chart that I’ve targeted. I often make my first hedge within the same day that I’ve initiated the trade to reduce overnight risk. If price is in a grinding uptrend that is often unnecessary but in more volatile markets it’s a good practice to follow! That Delta Hedge is a risk off trade to offer some portfolio protection.

You didn’t learn a vocation or graduate college in a few days or a few months! It took years and even for college grads the real learning takes place on the job. So why do traders think they can look at a few charts or worse yet, pay for a subscription service and have them analyze the charts for you, and then just rake in the money? You’re trading against highly efficient algorithms and the biggest and best traders on the planet! You have to put in the hard work of studying the techniques and strategies that myself and Travis from @RaadiaCapital demonstrate and explain on this blog. If you’re unwilling or unable to do that I sincerely wish you good luck because you’re going to need it if you hope to make money in this business, regardless of how many YouTube subscribers you may have!

Questions or comments can be made below this post or on the @VegaOptions twitter feed.