Katie and the Bat are back to continue Katie’s options trading training. They start out reviewing one of Katie’s recent trades in $XOP, outlining how Katie’s profit and loss is performing since the trade’s entry.
The trade was a covered call, in which 100 shares of stock are bought and a naked out-of-the-money call is sold against it, reducing cost basis.
This trade has positive delta and a bullish assumption – unfortunately, $XOP started moving down after Katie placed the trade, with volatility expanding, making the position a loser at the moment.
Tony (‘Bat’) thinks there is potential to improve the risk profile and directional exposure of the position. Before explaining how, the team covers the delta of the overall position, which is how much its profit and loss changes as the stock price increase by $1.
The stock has 100 delta and the call has negative delta that offsets some of the stock’s. Still, with overall positive delta on the position, the risk lies to the downside so they then discuss how selling another call can neutralize some more delta, while increasing risk to the upside. Overall, this allows for a small short-term improvement to the position.
They move on to discuss some of Katie’s other trades, touching on a $DOW position that was taken off for 25% max profit, and beta weighting her other positions to $SPY to get an idea of how overall market changes affect her portfolio.
Finally, they decide to put on a new trade in $GDX. After considering a long vertical spread and going through its debit, break-evens, and probability of profit, they choose to place a long call butterfly. This strategy uses two longs calls at different strikes and two short calls in between at the same strike to create a defined risk strategy with limited profits and losses. Implied volatility rank in $GDX is higher than 50, and so there is potential to collect premium on the short strikes.
To review, assessing delta allows a trader to see how their options positions and portfolio are affected by overall market moves. There are different was to adjust delta and realign directional risk. Ultimately, these decisions depend on one’s risk tolerance.
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