AWESOME Michael,
thanks heaps, gis
On Wed, Mar 24, 2010 at 10:50 PM, mcatolico <mcatolico@mindspring.com > wrote:
Well the flippant answer is: the best adjustment is the one that makes the
most money.
More specifically or helpfully, to me, the choice depends on the
circumstances that impact the trade. Let's say that at 185 with 4 weeks
until expiration you enter a condor +175/-180/-190/+195 with volatility
around 35%. With this trade you've made a short term bet on volatility
dropping and actual price holding relatively steady.
Scenario 1: over two weeks, the underlying drifts toward the 190 strike and
through to say 191. Here the circumstances are basically confirming your
forecast on volatility so all you really need to do is nudge the risk away
from your threatened 190 strike. Here, I'd look to add a fly roll (+190/-2
195/+200 or even a bwb roll +190/-2 195/+210) to stretch out the condor and
move the short strike to 195.
Scenario 2: a day or two into the trade, the specific underlying suddenly
gaps up strongly to 191 irrespective of the market as a whole. Here both the
original implied assumptions (declining volatility, steady to driftless
price movement) are pretty much proven wrong. Here, id have to reassess the
entire trade and look to at least provisionally get cautious and assume I
was wrong. I'd adjust by adding gamma to the threatened side and maybe add
some long deltas by selling some putside premium. an example would be
-190c/+3 195 to net into a 2X4 backspread on the call side and maybe I'd
look to get a bit of a credit by selling the -190p/+185p vertical
Scenario 3: over a week or so the underlying seems to drift back and forth
but maintains something of a net positive bias in line with the overall
market. The stock eventually breaches the 190 strike. Here things get a bit
more uncertain. Overall the implied assumptions of the initial position are
not necessarily disproven as volatility has probably declined and the price
movement may be possibly mild to potentially range bound. Here id want to
add some kind of theta positive trade and possibly look for a way to even
get short some deltas to try to capture a small scalp if the rally retreats
a bit. The trade id look to do might be an additional short call vertical -1
190/+195 and a bit of a bearish gambit with the +185p/-180p all for a small
net credit.
Obviously you can think of a dozen different scenarios and possible moves.
But for me the key is to focus on the two main parameters that come with
basically every option trade: changes in volatility and changes in price
direction. whatever you create via your initial - or subsequent - trade, is
what needs to be assessed as the market changes or time passes. If your
existing position is benefiting from what's happening, look to lock in some
of the gains and/or stretch the potential by adding to the winner strategy.
If there is a clear indication that things have gone the opposite of your
forecast, then seriously look to either convert to a neutral, wait and see
position or go full force into something of a completely opposite trade.
If, as is usually the case, things get noisy and you are not sure if the
trade parameters are being confirmed or being rejected, then act to either
curtail the risk or shift the zone where the risk lies by moving the trade
with the market.
-
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