Below is the current SPX position in the account that I refer to as the PDT (Pattern Day Trader) account. It is a smaller account (less than $25K) that is limited to a maximum of 3 round-trip trades within the same day over a 5 day period. PDT accounts are especially well-suited to using longer term trades since they typically don’t involve opening and closing the same trade on the same day unless a stop is triggered.
This position is primarily a bullish position since the maximum profit will be achieved if SPX is between 4150 and 4225 at Dec30 expiry. SPX closed at 4071.70 yesterday (Fri. 12/2/2022). However, the position is currently short (negative) Deltas meaning it’s a bearish position. In other words, it’s short-term bearish and longer-term bullish! Why would I structure a position that way? Before I answer that I’ll show you how I constructed this position in the first place.
Below are the actual order fills of the 5 trades that are the components of my current SPX position shown above. I took on $1,200 of risk on 10/24 by buying a $50 wide Vertical Call Debit spread. After a SPX rally I was able to narrow the spread to $25-wide and, in the same transaction, sell a $25-wide Vertical Call Credit spread for a total credit of $1,200 on 10/25. That left me with a Call Condor with a net cost of $0.00 and just 1 day of initial risk! I repeated the exact same 2 trades on 10/26 so, by the close of trading on 10/26 I owned 2 Call Condor’s with a net cost of $0.00 and a maximum profit of $5,000. Those trades are shown in number’s 1-4 below. Keep reading and I’ll explain trade number 5.
Below is the risk profile showing the position after the first 4 trades.
The position above has only +2.53 of Delta risk so it’s relatively neutral for directional risk but if I think the price of SPX is either extended to the upside and likely to need a pullback or if I see a bearish reversal on the daily chart I will Delta Hedge (DH) this position in a way that tips the Deltas from positive to negative. I don’t want to exit the position because the longer-term charts (weekly and monthly) are still bullish. The easiest solution and the best one to generate positive Theta is to sell another Vertical Call Credit spread.
Below is the same risk profile that I started this blog post with showing all 5 trades with an added white box around the 2 most important option Greeks for my current position; Theta and Vega! By selling that extra Vertical Call Credit spread (trade #5) I reduced the directional (Delta) risk of SPX moving lower but I did it in a way that more than doubled the position’s Theta! It also increased the short Vega of the trade. If SPX moves higher this month then it’s very likely that the VIX (the measure of implied volatility of SPX options) will decrease. That means I have 2 important option Greeks working in my favor! If SPX rally’s again and I forget to make another adjustment the most likely outcome is that the position would be profitable at expiry. So what can I do if SPX turns bullish again on the daily chart which would make it bullish on the daily, weekly and monthly charts? There’s several ways to flip this position to long Deltas but instead of me telling you I think I’ll wait a few days and see what suggestions the readers of this post can make. How would you adjust this position to flip this to a more bullish position? Leave your solution in the comment section below and I’ll update this post later after I see a few comments. Time to participate!
Before I leave this post for now I wanted to mention another way to protect a bullish position that isn’t good for generating Theta but can offer a lot of bang for the buck. In other words, a high reward/risk ratio. The 3-day (Fri/Mon) Calendar spreads are particularly cheap right now. I could add a Dec30/Jan3 (4-days due to the New Year’s holiday) SPX 3900/3800 Put Double Calendar for $345 that would cover downside risk through the end of this month. If I wanted really cheap protection I could simply buy the the 3800 Put Calendar for $145. If SPX is anywhere near 3800 at the end of this month that Calendar could easily be worth $30+. Buying that protection can allow me to hold my bullish positions without the worry of event risk. That’s just something else for you to consider!
That’s all for today. I look forward to seeing your comments below!!!!
Add Long Diagonal or Calendar to make trade delta bullish?
In hindsight, curious to know how what was the final structure of the trade before expiration?