Ever start out simple, with just one or two trades, and then end up with an entire mess of options? Congratulations! You’re now trading a “position”. Perhaps you’ve heard the term but aren’t sure what it means. You’re trading a “position” when you’ve gone beyond using just one strategy.
Trading a position is typically going to be much different than managing a single strategy. For instance, with a single strategy, the profit or loss of the trade may trigger an exit from the trade.
Here’s an example of this: you buy the June 50 call for $1.00, and you look to cut losses at 50% (if the call drops to $0.50), or you sell the call at a 100% profit (the calls moves to $2.00). In this case, the greeks may give you an indication of the change in value of the trade, but it’s the price of the option itself that is triggering the exit order.
If you compare that to a position with multiple options, the value of any one (or even more) of the options isn’t typically going to be the reason that prompts you to trade. The profit/loss of the position as a whole might trigger an adjustment or closing trade. But here, the greeks become particularly important with a position.
Delta and gamma are at the heart of gamma scalping a position. Theta and vega considerations might prompt a rebalancing of the position. And understanding the change in the greeks both over time, and with stock movement, really separates position management from a single strategy.
If you take the example of a long call spread, this trade will never attain any short deltas, except perhaps in the case of assignment on the short call. Depending on the makeup of a position, deltas can go from long to short and back to long again depending on where the stock goes.
While handling a position certainly differs from single strategy trading, it’s not quite as difficult as one might think. Take a look at the following position. I traded this position on the SPY’s many years ago, and while closing down the risk heading into expiration, I realized I was sitting on gold mine of material for a class on position management.
With approximately 2000 options across nine strikes, inevitably the first question a student raises in the class is “How did you get into all those trades?”. The answer is simple: “The same way YOU do. At times I was bullish; other times bearish; sometimes neutral.”
The real question isn’t how the trade was opened; it’s “what are you going to do now?”. Think of it this way: once you’re up in an airplane, how you got there really isn’t the issue. It’s how you’re going to land.
So, after considering the effect of the dividend, the expected range of the stock, and the greeks, I placed six very easy trades. Four ‘buy to close single option’ orders, one ‘buy to open single order’, and one stock order. That’s it. Don’t think that advanced trades need to be used. It’s more about an advanced understanding of using the simple things.
The effect of these six simple trades was three-fold:
- Neutralized the risk and locked in the profit
- Accomplished this with fewer commissions
- Added free options with synthetics
Granted, the likelihood of the free options paying off heading into expiration is quite slim, but if someone hands you free lottery tickets, you take them. For position trading, sometimes less can be a lot more, right?
Trade safe!
Greg Loehr
I have no relevant positions.
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