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