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.

David