The title of this post is a little deceiving, it should read ‘Risk On…Risk Reduced’. The only truly ‘risk off’ trade is an exited trade! If that’s not clear what I mean by that it should be clear after you’ve read the post.
Over a period of just less than 48 hours I made 7 SPX option trades. 4 of those trades involved buying a total quantity of 80 Oct14/Oct17 SPX 3600/3500 Put Diagonals and 3 of the trades were selling 80 Oct17 SPX 3600/3500 Put Verticals. That’s a process I refer to as Delta Hedging (DH’ing) a position. That left me with a total quantity of 80 Oct14/Oct17 SPX 3500 Put Calendars. See the fills below (it took 9 fills to complete the 7 trades)
Below is the risk profile of my current position with the 7 orders shown in the upper right hand corner. You can see how much I had invested in the position after each trade and where I reduced that investment. The idea is to put risk on at a good bearish trade location on the SPX chart and reduce that risk as price moves lower where the risk of bullish reversal increases. I cost averaged up as price initially moved lower but continued offering good bearish trade locations on the 60-minute chart and then I reduced the position’s invested capital when price reached potential support.
I now own an 80-lot of Oct14/Oct17 SPX 3500 Put Calendars for a $29,800 Credit. Since a Calendar spread is a debit spread if it’s not ‘legged into’ and the total loss on the debit spread is whatever you paid for it then you can see that the worst outcome for this position is a $29,800 profit with the greatest total risk taken of $82,000. I’ve locked-in a minimum return on investment (ROI) of 36% with the maximum estimated potential ROI of 300%+
To finish the post I’ll refer back to the title. Surely this is a risk free trade since the worst I can do is make an almost $30,000 profit! It’s not even close to being a risk free trade! I currently have an open profit of around $66,000. If SPX moves much higher in price and I don’t exit the Calendars then my open profit will go from $66,000 to $29,800. That’s more than $36,000 of risk! There is no such thing as a risk free trade if your open profit exceeds that amount you’ve locked-in.
That’s the post! Short and sweet. 🤩 Add your questions or comments below.