I’m going to show some posts from X describing the chart setup of Google that caused me to take a long Delta (bullish) position, how I traded that bullish bias and why I exited. Along the way I’ll be showing a option strategy that you’ve likely never seen before so read on!
At the time of this post I wasn’t interested in a GOOGL trade but as the setup developed I changed my mind about that.
The best method I’ve discovered for defining the trend on a chart are the 3 and 8 SMA (simple moving average) bands. The typical basis of a moving average is the closing price but I use the highs and lows instead. The upper band is the SMA of the highs and the lower band is the SMA of the lows. The 3SMA bands is more sensitive to changes in trend while the 8SMA bands is a smoother trend.
One of the nuances of reading price action is what should be happening at certain key levels. For instance, on the chart below you can see that price had been in a downtrend and price had found resistance on the prior 2 candles at the upper band but price didn’t continue the downtrend. Instead, it kept testing the high of the prior 2 days. That was an indication that buyers were more motivated than sellers.
I had bought some Apr4 Calls at the 175 strike and, as price went higher I had the ability to DH (Delta Hedge) those Calls by rolling them up to a higher strike (for a credit) as well as sell twice as many Call Vertical credit spreads. That created a Butterfly spread…sort of. Below you can see why this position is better than a Butterfly because it doesn’t limit the potential upside profit.
Below is the same risk profile but it’s easier to see the details.
At this point in the trade I had the ability to take my initial risk down from $5.10 per contract ($12,750) to just $.10 per contract ($250). That $250 would be the most that I could lose on the position. Again, the potential profit is unlimited to the upside!
Once again, the same risk profile as shown in the X post but bigger so you can better see the details.
Below is the X post explaining that I exited the position.
Here are the 2 fills in opening and closing the position. Total profit was $.50 per contract ($1,250)
You can see from the daily chart that price was at the prior week’s HB (Half-Back or midpoint of prior week’s range) so that was good location to reduce or eliminate risk.
Why not just DH the trade instead of exiting? That’s a good question and I was asked that very question on X and below is my response.
Questions or comments? Leave them down below!
1) very creative approach with selling credit spreads and having “better” butterfly
2) my pleasure to comment your post!
Paul, very interesting hedge structure. Like a backspread but with a profit kicker instead of a “valley of death.”
Really valuable tip about about not letting risk-free trades lull you into complacency. I think delta hedging works best as a tool to keep you in trades that are *working* on the primary timeframe–i.e., as protection against shorter-term risk–not as a justification for yolo’ing trades whose original thesis is broken.
Absolutely true when you said the DH strategy is a tool to keep you in trades with a chart that is working. If the chart breaks down it’s time to take profits.