MODEL/DEMO TRADE: SPY MARCH 15TH 263 SHORT STRADDLE

Pictured here is a model and/or demo trade set up for purposes of showing a "continuously rolled" short straddle trade in SPY where the straddle is rolled out as a unit for duration/credit at 5-10% max to strikes that will result in a <+/- 30 delta setup, with the ideal being to roll from at-the-money to at-the-money. This type of trade can be used in any liquid options underlying and modified to defined risk via the use of long option wings. (See, e.g., XOP Double Diagonal Post Below).

For purposes of the demo, mid price fill will be assumed with end-of-day share prices being used.

On setup:

Max Profit: 12.91 ($1291) (.64/$64 at 5% max; $129 at 10% max)
Max Loss/Buying Power Effect: Undefined/~$5200/contract (on margin); full notional (cash secured)
Break Evens: 250.09/275.91
Delta: -10.04
Theta: 14.53

Comment:

Let's have a look at our SPY short straddle ... . Last week, price moved up, and the net delta on the setup skewed out to -38 with the short put being valued at 2.95 and the short call being valued at 10.41 for a total of 13.37, so the position's a smidge under water at the moment. Consequently, I wouldn't do anything here because I generally want to roll/out (a) for a realized gain; and/or (b) when I have to. The "when I have to" occurs when a side is approaching worthless (neither is yet), I'm running out of time (there's still 39 days to go), and/or I'm running into ex-divvy and the extrinsic in the short call is less than the dividend (also, no problem there, since the short call is valued at 10.41; 263 + 10.41 = 273.41 versus 270.06 spot, so the short call still has 3.35 of extrinsic versus a potential dividend payment of 1.45 or so in March). Me, I'd hand sit on the setup another week, but I'll talk about a more "delta centric" approach in a separate comment ... .

Comment:

The Delta Centric Approach: As noted above, the short straddle has skewed out from flat to nearly -40 delta. Depending on how tolerant you are of skew out, you may or may not be happy with that -40 delta metric in the short run. After all, the bigger the delta a setup has in a given direction, the greater the loss it'll experience if it continues to move against you. There are pluses and minuses to making an adjustment here, with the plus being that you would flatten delta and therefore smooth out your P and L and bring in additional credit, thus improving your break evens. The minuses are: (a) you take an albeit small realized loss here; and (b) extend duration and therefore slow theta decay. Just as an example, you can roll out the March 263 short straddle to the April 264 for a 3.07 credit (increasing your scratch point to 15.98), which would have the effect of reducing position delta to -27.01. Theta decay would slow to 9.9. I have no particular problem with that approach beyond practical considerations: generally speaking, options farther out in time are less liquid, and you could easily find yourself rolling farther and farther out in time to remain "net delta happy" while taking a succession of realized losses in order to do so and slowing theta decay to a crawl in the process (although I'm not sure a theta metric of nearly 10 qualifies as a "crawl"). To a certain extent, it also depends on what you're comfortable with in terms of time frame: in the discretionary account, I'm more about getting into and out of trades and not hanging out in the them for extended periods of time; in the IRA, I'm generally fine with going out farther in time ... .

Comment:

Since I've got the two methodologies out there (the "realized gain roll" one and the "delta centric" one, we might as well track both here. Currently, the March 263 short straddle's valued at 14.44 or so and has skewed out to -52 delta. Since there's no gain to be realized, and neither side is approaching worthless (the short put's still worth about 2.00). With the delta centric approach, however, you'd want to roll out here to bring the setup back within +/- 30 delta. Rolling out to the April 267 would fit that bill and would bring in an additional 1.05 in credit. Scratch in the realized gain approach remains 12.91 for the March 263; scratch for the delta centric changes to 12.91 + 1.05 or 13.96 for the April 267, whose net delta is now 28.52 with theta at 9.70.

Comment:

I would naturally be neglectful if I didn't point out that either doing nothing or rolling out to cut net delta was the only thing you could do here. The other option: roll up the short put for a realized gain toward current price and to cut net delta. Here, however, I'm looking to keep the short straddle as a short straddle, rather than monkeying with an inverted setup.

Comment:

Correction: "Rolling out to the April 265" ... .

Comment:

Realized Gain Roll Setup: Do nothing. The position's in the red, the short put still has 1.46 left in it, and extrinsic continues to exceed potential divvy in the short call with 30 DTE (extrinsic of 2.07 versus last divvy of 1.44). Delta-Centric Roll Setup: Roll out to the May 267 for a 2.03 credit to bring the short straddle back to within 30 delta of neutral, upping your scratch point to 15.99 versus the May 267 short straddle value of 18.36.

Comment:

Realized Gain Setup: Rolling the March 263 to the May 271 for a .58 credit due to March ex-divvy assignment risk to bring it back into +/- 30 delta; scratch at 13.49 versus 17.38 short straddle value (i.e., under water). Delta-Centric Roll Setup: Rolling out to the June 269 for a 2.25 credit to bring it back to +/- 30 delta, scratch at 20.61 versus 21.75 short straddle value (i.e., under water).

Comment:

Just a couple of brief comments: One thing you'll notice right off the bat is that the delta-centric methodology (which looks to roll out for credit and bring the setup back to +/- 30 delta) has a flatter profit and loss in comparison to the realized gain setup (at least so far). However, that has come at a bit of cost. You've had to extend duration substantially which has the effect of slowing theta decay. Moreover, you've run out of road, so to speak: currently, the next available expiry is in September, so if you want to adjust it again in short order, you'll have to roll out from June (118 days until expiration) to September (209 days). On the other hand, the credits collected mean that the break evens have widened to 269 +/- 20.61 or 248.39/289.61 which is not a bad thing.

Comment:

Posting the theoretical rolls a day earlier than usual ... . Realized Gain Setup: There is a small realized gain in the setup over last week, as the straddle is now valued at 17.05 versus the 17.38 it was last week, but it's <5%. Neither side is approaching worthless with 80 days to go, so it's a "do nothing" with the scratch remaining at 13.49. Delta-Centric Setup: As previously noted, the setup has run out of road for a month to month roll. However, if you're going to stay absolutely mechanical, you'd roll here, even if it means rolling out farther out in time than you'd like, so rolling out to the Sept 269 short straddle (as is) for a 6.46 credit to bring the setup back to within +/- 30 delta. Scratch at 27.07 versus the Sept 269 short straddle value of 28.02 (a slight narrowing of the gap between current straddle value and scratch over last week).

Comment:

As with last week, posting theoretical rolls on Monday instead of Tuesday while I have time. Realized Gain Setup: There is a 6.8% gain in the setup versus the 17.38 it was the week before last (it's now worth 16.20), but it's still under water relative to the scratch point of 13.49, so rolling would be somewhat discretionary. In practice, I would grab the gain even though I'm not yet to my scratch point, so I would roll the May 271 to the June 272 to bring it back to within +/- 30 delta and for a 3.09 credit with a resulting scratch point of 16.58 versus the June 272 value of 19.29. Delta-Centric Setup: The Sept 269 is a smidge within +/- 30 delta with a current value of 27.58 versus the 28.02 it was last week (<5%) and very nearly at my scratch point of 27.07. Remarkably, this is the first week since comparing and contrasting the two strategies where the Delta-Centric is a "do nothing."

Comment:

Realized Gain Setup: The June 272's currently valued at 18.44 over last week's 19.29 (a 4.4%; .85/$85 gain week on week) with position delta at -28.84. Neither side is approaching worthless with 102 days to go. Even though it's mighty tempting to lock in that $85 gain, I generally like something north of 5% to blow a roll on, so would do nothing here. Delta-Centric Setup: The Sept 269 still remains shy of +/- 30 delta by just a hair and has a current value of 26.93 over the 28.02 it was when last rolled -- a 3.9%, 1.09 ($109) gain since last roll. As with the Realized Gain setup, I generally like to see something north of 5%, particularly where our choices are to either roll out to the September quarterlies or way out to December (no October is available yet). So it's a "do nothing" for the Delta Centric setup this week as well.

Comment:

Realized Gain Setup: The June 272's currently valued at 19.93 with a position delta of -39.51. Neither side is approaching worthless with 95 days to go, so it's a do nothing. The Sept 269 is currently valued at 28.41 with a net delta of -36.73. With the next monthly available being December, your options are (a) roll to December to bring it back to within +/- 30 delta; (b) invert; or (c) do nothing. Since we're trying to keep the short straddle as a straddle and adjust back to +/- 30 delta when it skews out, rolling from the Sept 269 to the Dec 271 for a 4.38 credit, with the resulting scratch point of 31.45 versus the Dec 271 short straddle value of 32.80. As you can see, keeping the short straddle as a straddle and at +/- 30 delta comes at a durational cost ... .

Comment:

Realized Gain Setup: The June 272's currently valued at 19.07 versus 16.58 scratch with a net position delta of -30.92 and neither side approaching worthless. With 87 days to go, it's a do nothing. Delta-Centric: The Dec 271's currently valued at 32.57 versus 31.45 scratch with a net delta value of -25.87. Also a do nothing.

Comment:

Realized Gain Setup: June 272 current value: 21.88 versus 16.58 scratch, -51.12 net delta, neither side approaching worthless with 79 days to go. Delta-Centric: Dec 271 current value of 34.35 versus 31.45 scratch, -35.88 net delta. Roll to the March '20 273 for a 3.79 credit, bringing the net delta back to -29.8 with the March '20 273 having a current value of 38.14 versus a scratch point of 35.24. Generally, things don't go up forever, but this has been going up for quite a long time here ... .

Comment:

Although I think you can surmise the lesson of doing things this way already (i.e., that you will want to consider inverting to delta balance in lieu of rolling out the short straddle in time to do so or alternatively, balancing less frequently or on greater delta skew out), I'm going to continue tracking these setups just for educational purposes: Realized Gain Setup: June 272 current value: 22.57 versus 16.58 scratch, -57.54 delta (crikey!), neither side approaching worthless with 74 days to go, so do nothing and let the probabilities play out. Delta-Centric: March '20 273 current value: 38.49 versus scratch point of 35.24 with a net delta of -33.12. Rolling to the June '20 273 (as is) for a 3.72 credit, bringing the net delta to -28.15 with a current value of 42.21 versus 38.96 scratch.

Comment:

Correction: The Delta-Centric would have had to have been rolled to the June 275, since there are only five-wides available in that expiry.

Comment:

Periodically, the market gives you what you need. Realized Gain Setup: Here, the patient would've been rewarded with SPY closing at 275.27 and the short straddle valued at 10.48. Covering would've resulted in realizing a 16.58 - 10.48 = 6.10 ($610) gain. Delta-Centric: Similarly, the movement of price back in toward the short straddle would've been favorable to the Delta-Centric setup: The June '20 275 short straddle was valued 32.93 at the close versus 38.96 scratch, which would've been a realized gain of 38.96 - 32.93 = 6.03 ($603).