How It All Works…Sometimes

Yesterday I tweeted that there was an opportunity to add long /ES (bullish) Deltas on the potential 30-minute bullish reversal. The buy zone was 3971-74 and the stop was 3964.50. That’s 10 points of risk. That’s important because I didn’t know that it was a bullish reversal, only that it had the potential to be one IF price found support in the Fib support zone during a subsequent candle. After all, one of my favorite sayings about price analysis is…Nobody Knows Nuthin’. All we can do is locate price levels or price action where an outcome is likely to occur and a where a reasonable stop level can be calculated. Here’s that tweet.

There were 4 important levels or zones mentioned in the tweet or on the chart. The entry zone for a bullish trade was 3971-74, the stop level if a bullish trade was triggered which was the 3964.50 low of the reversal candle and the 2 upside targets of 4018 and 4031. Here’s the full-size chart that was in the tweet.

Price entered the ‘buy zone’ during each of the following 2 candles and so a long could’ve (should’ve) been entered at 3974 which was the top of the zone. A long trade initiated there would’ve had 10 points of risk (before the stop would be triggered) but the actual drawdown was just 1.25 points before price began to rally. Now the potential bull reversal is a confirmed bull reversal and now that the bulls have the ball they needed to follow thru by starting to break out above prior candle highs. Next level of interest to the upside is 4018 since that’s the 50% retracement of the prior day’s range. That’s a common target for a retracement in a trending move. /ES is in a downtrend on the daily chart so I expect resistance near the midpoint (50%-61.8% retracement) of the prior day. That explains the 4018-31 target. Look at the chart below to see how well that target performed.

I was short Deltas in my portfolio because, as I mentioned above, /ES is in a downtrend on the daily chart. So how did I trade that bull reversal setup? First thing I did was add some long Calls to reduce my existing short Delta position.

I then placed an order to hedge 5 Calls of the position just below the first upside target at 4018. I could’ve hedged the entire 15 Calls but that would’ve taken my portfolio back to very short Deltas and I thought there was a good possibility price could continue the rally to the 4031 target. Here’s the chart showing the placement on my resting orders.

After the first order was filled /ES began to breakdown again so I closed the remaining 10 Calls

Below is what the risk profile based on those Call transactions looks like. I’ve locked in a minimum $1,437 profit while maintaining a potential $6,437 profit at expiry.

Finally, I used today’s move lower to cash in some of my earlier positions because, after closing those Calls I was short a large amount of Deltas. I wanted to convert those short Deltas into Theta. Here are today’s transactions including closing some of those Calls in the overnight session.

After all of those transactions, this is my current portfolio’s risk profile. I’m still short 135 Deltas but I have little Gamma risk and I now have over $6,000 in Theta. That’s what I meant when I said I wanted to convert my short Deltas into Theta. Theta is better than any of the other Greeks over a long period of time! The ‘trick’ is working your way into a high Theta position that doesn’t also have a high level of Gamma risk.

If you have questions or comments, add them down below!