Papale’s Market Pep Talk

I love this time of year.  The heat and humidity of the summer is gone.  The days are warm and dry and the nights are cool.  Air is crisp and clean and even the sky looks a little bluer.  The leaves have just barely started to turn and soon the ground will be covered.  Our annual fall leaf pile football game will be coming up soon.  I really love this time of year.  Where ever you are, I hope you take time to enjoy the changing of the season with family or friends.  And if you get a chance, root for my Spartans this weekend.  They could use the boost.

Making adjustments to our positions as markets move can be a smart way to conserve our capital while allowing us to stay in our positions a bit longer with less risk.  Generally, adjustments take the form of buying or selling deltas to bring them closer to flat.  By doing this, we essentially turn an unrealized loss into a realized loss.  The position however at this point has less exposure at least in terms of delta and hence less directional risk.  There are several different ways and rules when it comes to making adjustments.  Whether it be by placing a spread or simply an outright, the desire is to take off risk.  There are a couple of things to consider when thinking about your adjustment.  When using spreads, generally you will need to do more to achieve a desired amount of delta.

For example a ten point call spread may have a delta of 20.  If you are trying to buy 100 deltas, you will need to buy 5 spreads to achieve this.  Obviously the width of the spread and how far in or out of the money it is will have an effect on the delta of the spread.  When using a single option as an adjustment, generally you will need less contracts depending on what strike you choose.  In the previous example, buying two at the money calls will be enough to cover our desired delta.  The point here may be obvious but nonetheless worth mentioning.  While there are many ways to adjust your positions, at the end of the day, you are converting open ended risk into a realized loss.  How you do that may be less important than knowing when to do it and then actually doing it.

Steve Papale is a mentor with DiscoverOptions, the educational arm of OptionVue Systems.  Inquiries should call 847-816-6610 or email info@DiscoverOptions.com.

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