To address some questions regarding my current position. I’ll add more to this post later.
First, let’s look at the PDT account’s combination position of Jan3/6 SPX 6045/6050 short Call Diagonal and 6050 Call Calendar with a $780 cost that was bought when it was a bullish OTM position. Now it’s perfectly centered with an open profit of $232 (30% return on initial risk) but with my expectation of SPX continuing to rally for another 7-14 days this isn’t the position I want to hold because it could soon turn into a bearish short-Delta position.
Several ways to hedge this position. I could use a Vertical Roll to move the short Diagonal up from the 6045/6050 strikes to 6095/6100. That would be a $.45 debit so that would increase the position’s cost from $780 to $870. I don’t generally like to adjust a position by adding cost. I’d much rather reduce cost by Delta Hedging (DH) it!
I could also roll-up (Vertical Roll) the 6050 Calendar up to 6100 for a $1.15 credit so that would reduce the position’s cost from $780 to $550. I like this position adjustment better but it’s still not as bullish of a position as I would like. Any other potential adjustments?
I could do a Vertical Roll on both positions and move on from the 6050 target area by making the 6100 area my new target area. That would reduce the position’s net cost to $640. Based on my expectation of a continued SPX rally this seems like the best choice. But what if I’m wrong about SPX continuing to rally? Won’t be the first or last time that my expectations aren’t met! However, this roll-up has reduced my cost so, even if the SPX rally is over, my loss would be less than if I did nothing at all.
I’ll add more to this post addressing the other positions but, for now, focus on the benefits of the Rolling Calendar spread trade. If you click on that link it’ll take you to my post discussing the use of that strategy to make a large profit trading the current Tesla rally.
1st update: If I add those 2 Vertical Rolls to my current SPX/ES position the risk profile would look like this. Had a question why I hedged the SPX position with an ES long Call (plus I’ve since added a 30-point wide Call spread) instead of selling Put credit spreads to generate Theta. The problem with Put credit spreads is they don’t generate much credit in comparison with the risk (they are cheap to sell and I don’t want to sell cheap, I want to buy it) and, if SPX continues to rally they offer limited upside protection. I want the risk profile curling up on the right side in case this rally really takes off!
There is a way to hedge the cost (downside risk) of a long Call without limiting it’s upside potential. That solution is to Roll ‘Em Up! If I sold the ES 6100 Call and bought the 6120 Call that would generate a $11 credit. That would take the net cost from $21 (the original cost of the 6100 Call) to just $10 for now owning the 6120 Call. If SPX continues to rally I might be able to roll it up again for another credit, again, without limiting the upside protection on a long Call.
12/26 Update: Rolled the Jan3 ES 6100 Call up to 6150 and generated a $21.50 credit. That’s $.50 more than I paid for the 6100 Calls.
I now own the ES 6150 Call for a net price of a $.50 credit. I still have risk in this position because the open profit is $775 and I can lose almost all of that profit if ES doesn’t rally above 6150 by Jan3 expiry. However, since I’m using this position as more of an insurance policy against the risk of SPX rallying so strongly that the portfolio’s short Call Diagonals lose money, I don’t mind potentially giving back most all of that open profit. The important thing is having eliminated all net initial cost.
