Options Corner – 17 October 2020

Beer Garden at Regensburg Abbey, Germany – Those Monks are Smart!

I have not made any adjustments to my “portfolio hedge” position since 6 October (https://itawealth.com/options-corner-19-september-2020/) but, with the October Options expiring last Friday it is time to take a look at the remaining position.

SPY traded around the $350 level for most of last week and I had to “sweat it out” a bit because I was holding a short Call at $350 that was expiring on Friday. At Mondays highs it would have cost me over $500 to buy back this single leg of the trade. However, with the extended bullish run, and the fact that $350 is a nice “round” number (“round” numbers tend to offer strong levels of support/resistance) I chose to “sweat it out”. SPY eventually closed at $347.29 but it was not until the last hour of trading that it dropped comfortably below $350. Not wishing to push my luck too much I bought back the short $350 Call at 0.10 ($10 debit) ~1 hour before the close.

The position (before the buy-back) looked like this:

and, after the buy-back, like this:

In tabular format the PnL looks like this:

The above illustrations show PnL before the expiration of other Option legs that were to expire on Friday. On Saturday, after October expirations, the remaining “position” looked like this:

with all remaining “legs” expiring in November. Note that I now have an extra long Put leg that is giving me a nice downside hedge through the election period. This was the objective of building this position and (to date) has been achieved at no cost – in fact with $172 unrealized profit (that would have been eaten up had I had to bail out of the $350 Call for more than $182).

In spreadsheet format the position now looks like this:

Going forward from here I will be looking to sell more premium – probably in the December Option series – so as to “bank” some money to buy a Nov/Dec Calendar spread that will leave me with an extra long Put Option expiring in December when the near-term Put Option expires in November.

Although Implied Volatility is on the rise, I am still expecting it to return to the ~30 level in the next 2 weeks. I will therefore not rush to sell premium too quickly.

Update: 23 October 2020

After making the adjustments described in the Comments section below my current “position” now looks like this:

and, in tabular format, like this:

For a picture of where the “legs” are located we can check the position spreadsheet:

I am still looking for a little movement and an increase in Implied Volatility so as to make it attractive to sell more premium (in December Options) at different strikes.

Update: 30 October 2020

As outlined in the Comments section I sold 2 Iron Condor Spreads in the December expiration cycle for a total credit of $360. On Friday I also chose to buy back the short Calls that I was holding at the $375 and $385 strikes at a net cost of $11 – this leaves me with 2 “lottery ticks” in Calls in the event that there is a surge to the upside after the elections. I am already long an extra Put as my hedge to the downside. The current position now looks like this (top right):

As can be seen from the bottom left figure, above, Implied Volatility has risen significantly over the past few days that has made the sale of Options more attractive due to the higher premiums.

In tabular format the “position” now looks like this:

with an unrealized profit of $535 on a hedge position with $1054 maximum risk (that is a long way from current prices).

I now have on a position that I was looking for going into the elections – basically a Put hedge at zero cost (currently $535 profit). As a bonus, I also have protection to the upside (although I don’t really need this since portfolios will show profits if prices move up).

In spreadsheet format my current “leg” holdings look like this:

I realize that these posts may be a little difficult to follow for readers not familiar with Options but I hope that they do provide a little education and insight as to what can be done with Options without having to commit a lot of money.

Update: 13 November 2020

With one week before the expiration of November Options this position is sitting uncomfortably close to the $360 strike price of my short Call Option that will be expiring on Friday. I therefore need to make a decision as to whether to “sweat it out” or to limit potential damage by buying back the short Option. As I’ve mentioned in my Rutherford posts, SPY has traded in the $320-$360 range over the past ~3 months – so $360 represents a possible area of strong resistance. Unless there is an obvious breach of that resistance level I will therefore sweat this one out – but I will be watching it closely over the next 5 days.

Since this is a portfolio hedge position there is no strong objective to make money in a bullish market – and SPY is up ~$20 since this position was initiated – so, if I can break even with a zero cost hedge it will be mission accomplished. So far, we have not seen any weakness in the markets due to uncertainty caused by the elections – but, maybe it’s not yet over, especially with Covid-19 concerns factored in.

David