Options Trade #39 - SPY Strangle


VTS Community,

I'm going to do another adjustment today on my current SPY Long Tactical Strangle  (trade # 36)  in the Discretionary Options Strategy.

Since Long Strangles are made up of both a long Put and a long Call, technically they can profit from market movements in either direction.  That can happen because the gain on one of the positions may offset the loss to the other position. 

So for example, if the markets go up significantly, the put option will surely lose money.  But if the up move is significant, the gain on the long Call can be more than the loss on the Put and the whole trade makes money.

However, there is another component to all options trades and that is volatility.  Long Strangles are what's called long Vega.  Long Vega trades profit when volatility increases, and they lose money when volatility declines.

-  Volatility typically rises when stocks decline
-  Volatility typically decreases when stocks go up

Now those aren't written in stone, there are times when the opposite can happen, but in general that is the case.  So for a long Strangle, even though it's technically a market neutral trade, it's definitely more advantageous to have the markets decline during the life of the option.  The trade will gain by both the price decline and the increase in volatility.


My goal for Long Strangles and Straddles is to try to have one open during market crashes.  That way, any smaller losses on some of the trades that don't work out are more than paid for by a larger win.  Here's all the ones I've taken in the past year with the profit shown.

Trade #4:  +2.7% Trade #14:  (-12.0%) Trade #20:  +72.2% Trade #28a:  +279.3% Trade #28b:  (-7.3%) Trade #34:  (-1.0%) Trade #35:  (-4.8%)

Even though there have been 4 losers and 3 winners, the trade overall has been a smashing success because I had two of them open during corrections last year.  That's the goal, as these trades can be highly profitable during a market crash due to that added boost from increasing Vega.

Extra reading:  Options Trading 101 - Part 6:  The Option Greeks


So trade #36 has been open a while now, but it's time to adjust it.  That just means closing the current trade, and opening a new trade centred around today's price.


The Trade:

-  First: Close trade #36 SELL to CLOSE 1 x 18 April 19' SPY 265 Put SELL to CLOSE 1 x 18 April 19' SPY 285 Call Credit:  ~ 3.15 * prices move around intraday, so the higher the better

-  Second: Open trade #39 BUY to OPEN 1 x 17 May 19' SPY 270 Put BUY to OPEN 1 x 17 May 19' SPY 290 Call Debit:  ~ 4.20 * prices move around intraday, so the lower the better




Margin Requirement:

Long Strangles are defined risk trades and only require the capital equivalent to the maximum potential loss.  It's just the cost of the contract multiplied by the options factor of 100, and then multiplied by the number of contracts.

4.20  x  100  =  420.00 margin per contract

420.00  /  25,087.37 model portfolio value  =  1.7%

* You can scale your trade to roughly 2% of available capital within your VTS Discretionary allocated funds.


Risk management / future action:

Many of my go to option spreads use well defined risk management, but these Tactical Strangles don't.  Having said that, there are three typical actions that I take:

1)  Close the trade out for profit as a single spread if price moves substantially and fairly quickly.

2)  Close the trade out for a loss as a single spread if no major price movements occur, potentially just opening a new trade the same day.

3)  Close the winning side out for profit, and look for ways to "tactically" use the losing side in a new trade construction.  That's what I chose to do with Trade #28, taking the large profit on the put side and then allowing the call side to recover some of its losses.  

As always with options trading, using a paper trading account and not risking any real capital until you're more comfortable is always a good idea.  The first step is always education and learning how it all works in different market environments.  There's plenty of time in the future to put live capital to work, so consider a paper account.



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