Adjusting
Sometimes the position a trader starts off with is not the position he or she
should have at present. Sometimes positions need to be changed, or
adjusted, to reflect current market conditions. Adjusting is very important to
option traders. To be good at adjusting, traders need to use the greeks.
Imagine a trader makes the following trade in Halliburton Company
(HAL) when the stock is trading $36.85.
Sell 10 February 35–36–38–39 iron condors at 0.45
February has 10 days until expiration in this example. The greeks for this
trade are as follows:
Delta: −6.80
Gamma: −119.20
Theta: +21.90
Vega: −12.82
The trader has a neutral outlook, which can be inferred by the near-flat
delta. But what if the underlying stock begins to rise? Gamma starts kicking
in. The trader can end up with a short-biased delta that loses exponentially
if the stock continues to climb. If Halliburton rises (or falls for that matter)
the trader needs to recalibrate his outlook. Surely, if the trader becomes
bullish based on recent market activity, he’d want to close the trade. If the
trader is bearish, he’d probably let the negative delta go in hopes of making
back what was lost from negative gamma. But what if the trader is still
neutral?
A neutral trader needs a position that has greeks which reflect that
outlook. The trader would want to get delta back towards zero. Further,
depending on how much the stock rises, theta could start to lose its benefit.
If Halliburton approaches one of the long strikes, theta could move toward
zero, negating the benefit of this sort of trade all together. If after the stock
rises, the trader is still neutral at the new underlying price level, he’d likely
adjust to get delta and theta back to desired territory.
A common adjustment in this scenario is to roll the call-credit-spread legs
of the iron condor up to higher strikes. The trader would buy ten 38 calls