This is a vast and most probably the most important topic. Of course it is assumed that basics on Greeks are understood prior to delving in the subject. It is also recommended to practise position adjustments on a demo account to get a good feel how what could go seriously wrong without addressing position adjustments in a timely and orderly manner. This page is only a teaser in a way, as no options trader should go live without at least a few hours of coaching and / or following a trade alert service for half a year or more.
We are here only covering delta-neutral positions, i.e. OM’s flagship Weirdor strategy with some excursions on other techniques like Calendars and Butterflies. For all market neutral strategies, i.e. non directional, common sense teaches everyone to take care of the following basic alerts:
- Delta is too big (what threshold though?)
- The position has moved “out of the tent” i.e. departed from the safe probability zone
- P&L is getting worrisome
The questions one then needs to ask oneself:
- How does one then adjust Delta? Should one cut it to zero ? Not necessarily.
- How to interpret Gamma and Vega ? It depends if the position is Vega-positive (e.g. Calendar) or Vega-negative (Butterfly, Condor). An adverse Vega affects P&L irrespective of Delta. Gamma is a Delta modifier so it should certainly remain at the back of our mind, particularly closer to expiration. Gamma often does not much affect Condors and its variants. We however note that Gamma is a by-product of Theta: all Theta traders are subject to negative Vega.
Position adjustments are sometimes viewed more as art than science and there will often be more than one solution to each case for adjustments. It is essential to have a market sentiment regardless the fact the position is meant to be delta-neutral. Also one must keep in mind that adjustments cost money ! So while one may have to do something based on an alert, it is just as essential to predict the next move like in a chess game. In fact one should talk of lasting adjustments, and never run after the market.
Here below is a simple example on a Condor, no matter if it is Low-Prob or High-Prob. Actual Delta alerts will change according to the exact strategy, time to expiration etc. That is where seasoned traders make money where beginners don’t…