Adjustment to Feb bearish butterfly
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[…] I followed John’s lead and made an early adjustment to this trade, not waiting for the rules to trigger. I did for these […]
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[…] Update: Last night John posted in his blog that he went ahead and did the adjustment described below without waiting for the Δ:Θ ratio to […]
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John, it will be interesting to see how this plays out. If so, it would nice if we could express your decision in a guideline that might be used in the future. Something like: (Delta:Theta > 1.1) and (Price > $10 past the upper short strike) and (Price < $60 above reference point) and (All of the above criteria have been true for the past 5 trading days). How would you express this?
Phil, the guidelines provided are designed to work in a very wide variety of market conditions and do so extremely well. Therefore, I would not change any Delta/Theta ratios nor price point adjustments in the general guidelines. That said, ANYTHING that is designed to “work” in a very wide variety of conditions, can be improved upon when applied to specific market conditions. The specific market conditions, ie what has been happening for the duration of the trade, is that the price is creeping up just enough to drain money out of the trade but not enough to do anything about it per the guidelines. In addition, from a practical standpoint, the indices are coming into resistance levels but are not doing so at the same rate which creates a situation where we have a very wide resistance “area” and it is difficult to get a clear picture exactly where the market is going to turn. This in turn could cause the creeping to continue. These conditions “normally”, and should, show up in the Delta/Theta ratio. For whatever reason, the conditions are not reflected in the numbers, but through experience, I realize that they should. That being the case, I do not want to be so far behind the market. In addition, doing the roll still leaves me in a very good position for a market retracement so I did not see a downside to making the move. Therefore, I jumped the gun on the Delta roll. This now creates a situation where I will add the last 1/3 of the position at 780 instead of 20 points behind the market (760) “assuming” the market is over 780 at the specified time I check the market. As a note I will be skiing on Thursday and will most likely wait till Friday to add the last 1/3 of the position even if we get a large up move. So the only way I could express this is “if the the market is near the 1.5/1 Delta/Theta and for more than ???5 days??? and doing the roll does not put you at risk of a downside loss, then make the roll.” but even then, that would be on a situation by situation basis.