Now, we are relatively Delta-neutral. What happens if the price should move down? Let’s say it drops $1, to $69. Now, we are short 200 Deltas.
We know that if we buy stock, it will bring us back to a Delta-neutral position. Now, all we have to do is go back to our Trade tab, and purchase. We’re always going to use the last trade, because we’re in after hours, and the bid and ask spread has really widened out.
In order to bring us back to Delta-neutral position, we’re going to have to buy an additional 200 shares of stock. That will bring us back to a relatively neutral Delta position, at -9. Now, you’ll notice that even though the stock has moved down, we are now long 300 shares, in addition to our straddle.
We are in a Delta-neutral position. Let’s say it moves down another dollar. We’ve had a real sell-off in the market, and the price keeps moving down on us. Now we’re short another 173 Deltas. In order to get Delta-neutral, we need to go in and purchase another 200 shares of stock.
That brings us back to a relatively neutral Delta position, slightly long Delta of 26. We are now long 500 shares of the IWM ETF. This is not totally realistic, because as we continue to trade, the straddle will also change in price.
Now, what we need to do, is we’re currently long 500 shares, and slightly long Delta. As you know, many times, stocks will fluctuate up and down. It happens quite frequently, as a matter of fact. We just need a two-point drop in the IWM, and then it rallies back to $69.50. Not all the way to where we purchased it, but pretty close.
Now we are long 261 Delta. I always think of Delta as shares of a stock. We’re long 261. In order for us to get back to Delta-neutral, we need to sell 260 shares of the stock that we’re trading.
How can we do that? We can sell 100. We can sell 200. If we sell 200 shares, that will get us fairly close to being Delta-neutral, at 61. The one thing I forgot to do, though, was the last two times that we bought stock, the price was actually different. The last time we bought stock, it was at $68.51, or something close to that.
The stock that we bought – the last time that we needed to get Delta-neutral, we bought 200 shares, at $68. In order to get back to Delta-neutral, we need to sell those 200 shares that we bought at $68.51, for the current price, at $69.51. That gave us a $200 profit.
We also have our other shares, and I forgot to change this one too, that we bought at $69.31, or something close to that. Now, we still have our 300 shares. We’re still long 300 shares, at different prices. We sold the stock that we bought last time, at $68.51, and we sold it at $69.51, the current price of the stock. That helped us generate a profit.
Not only have we generated enough of a profit to counteract the Theta decay for that day, but now we have generated a profit for that day. Let’s continue. Let’s say we also get another strong rally. We go up to $71.51. At $71.51, we are now long 400 Deltas. In order to get to Delta-neutral, we need to sell 400 shares of stock, at $71.51.
We bought 200 at $69.31, which we will sell now, at a profit of approximately $2 a share. That’s a $400 profit. We also have another 100 shares, because we’re still long 224 Deltas. We purchased at $70.11, which was one of our original transactions. We can now sell it for $71.51, generating another $100 in profit.
That brings our total profit very close to $500 or $600. We’ve been able to trade based on the Delta alone. Even after we sold our 500 shares, we’re still long 154 Deltas. In order for us to be Delta-neutral, we need to sell 100 shares. That will bring us to a Delta of $24.30. We are selling at the current price of $71.51.
That brings us to a relatively Delta-neutral position. If the rally continues, and goes up another point to $72.51, now we are long another 197 Deltas. In order to bring us back to Delta-neutral, we need to buy another 200 shares. We’re going to buy those shares at the current price, of $72.51.
Now, once again, we are in a Delta-neutral position.