23 lines
1.6 KiB
Plaintext
23 lines
1.6 KiB
Plaintext
Day Seven
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This was the quiet day of the week, and a welcome respite. On this day, the
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stock rose just $0.25. The rise in price helped a bit. Mary was still long 560
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deltas from Friday. Negative gamma took only a small bite out of her profit.
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The P&(L) can be broken down into the profit attributable to the starting
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delta of the trade, the estimated loss from gamma, and the gain from theta.
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Mary ends these seven days of trading worse off than she started. What
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went wrong? The bottom line is that she sold volatility on an asset that
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proved to be volatile. A $4 drop in price of a $42 dollar stock was a big
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move. This stock certainly moved at more than 25 percent volatility. Day
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four alone made this trade a losing proposition.
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Could Mary have done anything better? Yes. In a perfect world, she
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would not have covered her negative deltas on day 3 by buying 280 shares
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at $41 and another 280 at $42. Had she not, this wouldn’t have been such a
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bad week. With the stock ending at $38.25, she lost $1,050 on the 280
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shares she bought at $42 ($3.75 times 280) and lost $770 on the 280 shares
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bought at $41 ($2.75 times 280). Then again, if the stock had continued
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higher, rising beyond $42, those would have been good buys.
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Mary can’t beat herself up too much for protecting herself in a way that
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made sense at the time. The stock’s $2 rally is more to blame than the fact
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that she hedged her deltas. That’s the risk of selling volatility: the stock may
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prove to be volatile. If the stock had not made such a move, she wouldn’t
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have faced the dilemma of whether or not to hedge. |