A quick post regarding a TSLA trade I made this week. I was bearish the stock based on the chart so I made 3 separate trades initiating a new bearish position. The last 2 trades were more expensive than the prior one because I was cost averaging UP. I often use that strategy to increase the size of a position when I see additional entry points on the 60 minute chart. I won’t go into the price action analysis here but if you’re looking for a better understanding of how I analyze price action, check out my previous post: PIVOT!!!!!
Below is the risk profile of my current position and the order fills. After Delta Hedging the 6-lot Vertical Put Debit spread by rolling down the long strike I have reduced the net risk from $5,970 to $1,380, the current open profit is $1,152 (83% return on net risk) and a maximum potential profit of $10,620 (would be a 669% return on net risk).
There were 2 easy adjustments I could’ve made at Friday’s close to further reduce the position’s net cost. I refer to these types of adjustments as DH’ing a position. That refers to Delta Hedging and you can find many references to that topic on this blog. To be clear, I did NOT make either of these adjustments. Whether or not I should have made them will only become clear in the future. For now, I’m still bearish the stock based on the chart so I’m holding the position as is.
Below is the standard Put Butterfly that I could’ve rolled my Vertical spread into. My initial position was a $40-wide Put Vertical Debit spread. After my initial adjustment of selling a $20-wide Put Vertical Credit spread I was left with a $20-wide Put Debit spread. Selling a further OTM (out of the money) $20-wide Put Credit spread would result in a $20-wide standard Butterfly spread.
Below is another DH adjustment that I could’ve made. I could’ve sold twice as many $10-wide Put Credit spreads. That would’ve resulted in an Unbalanced Butterfly. Compare the 2 DH adjustments and see which you might have done.
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Nice walkthrough. One must take care not to sacrifice too much of the reward for taking the initial risk; yet, minimizing that risk is prudent to long term profitability – and mental health. 😉 If $TSLA sells off, Paul could close the position for a profit, reconsider selling an OTM put spread to cover what remains of his initial outlay, or simply roll down the long put once again. Personally, I refrain from this latter tactic until the roll is worth $4 out of the max $5 on 5-wide strikes, which often requires the long put to be ITM.
At the time you were building your bearish position, which i believe will bear fruit shortly, I was bullish $TSLA, believing it would make an attempt at 450, so I opened a synthetic stock position where I buy the “top of the stock”. This could be done with a combo: selling a put and buying a call; however, I use a call back ratio spread (2:1) whereby the long calls are far enough ITM to offset the extrinsic value of the short ATM option. This option strategy is popularized as the ZEBRA: Zero Extrinsic Back RAtio.
Great comments per usual JL! The decision as to when to reduce risk on a trade is a difficult one. You mentioned rolling a strike when you can collect 80% of the max value of a spread and that is something I often utilize as well. One strategy you can consider is to eliminate all initial risk in a position when it’s available and then add risk back on during a retracement. For instance, if I had $1,000 of initial risk on a $30-wide spread and I had the opportunity to get to $0 net cost by rolling into a $10-wide spread I might take that trade. Then, if price retraces back to the original entry point I could make the original $30-wide trade *again* for $1,000 and then I would own a total of a $40-wide for the same cost as a $30-wide.