27 lines
1.9 KiB
Plaintext
27 lines
1.9 KiB
Plaintext
The trade is no longer neutral, as it was when the underlying was at $90.
|
||
It now has a delta of −2.54, which is like being short 254 shares of the
|
||
underlying. Although the more time that passes the better—as indicated by
|
||
the +0.230 theta—delta is of the utmost concern. The trader has now found
|
||
himself short a market that he thinks may rally.
|
||
Closing the entire position is one alternative. To be sure, if you don’t have
|
||
an opinion on the underlying, you shouldn’t have a position. It’s like
|
||
making a bet on a sporting event when you don’t really know who you
|
||
think will win. The spread can also be dismantled piecemeal. First, the 85
|
||
puts are valued at $0.07 each. Buying these back is a no-brainer. In the
|
||
event the stock does retrace, why have the positive delta of that leg working
|
||
against you when you can eliminate the risk inexpensively now?
|
||
The 80 puts are worthless, offered at 0.05, presumably. There is no point
|
||
in trying to sell these. If the market does turn around, they may benefit,
|
||
resulting in an unexpected profit.
|
||
The 80 and 85 puts are the least of his worries, though. The concern is a
|
||
continuing rally. Clearly, the greater risk is in the 95–100 call spread.
|
||
Closing the call spread for a loss eliminates the possibility of future losses
|
||
and may be a wise choice, especially if there is great uncertainty. Taking a
|
||
small loss now of only around $300 is a better trade than risking a total loss
|
||
of $4,200 when you think there is a strong chance of that total loss
|
||
occurring.
|
||
But if the trader is not merely concerned that the stock will rally but truly
|
||
believes that there is a good chance it will, the most logical action is to
|
||
position himself for that expected move. Although there are many ways to
|
||
accomplish this, the simplest way is to buy to close the 95 calls to eliminate
|
||
the position at that strike. This eliminates the short delta from the 95 calls, |