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Hello, tradeologists. We are really getting into something interesting here. I think you’re really going to like this strategy. It’s very exciting. It’s something that should come naturally to you, after going through the first 9 modules here. You should really have a good understanding of what you’re looking at. This is our profit graph. This is the graph that we use all the time, when we’re doing positive Theta trades.
This is a positive Theta trade that I have on right now, on the QQQs. As you can see, we’re positive Theta, about 42.78. That means that we collect money every single day that this position is on. Options will expire, and option premiums will decrease and decay over time until expiration, as long as they’re out of the money, or even at the money.
What I have here is the September iron condor. What is an iron condor? An iron condor is really nothing more than a bunch of vertical spreads for credits. You’re basically doing a bunch of credit spreads. As you can tell right now, our current price is right here. It’s slightly off to the center. Of course, we would like to be at the center. It isn’t. It’s slightly off the center.
In times previous, in the previous modules, I’ve talked about adjusting. Many people have written to me and asked me about adjusting. Sometimes they get it, and sometimes they don’t quite get it. I say that adjustments are probably the most important thing that you can learn on this course. Once you put a position on like this, what happens if it moves against you?
Remember what we talked about in Gamma scalping. In Gamma scalping, what we did was, we purchased a straddle. Then we traded the stock around that. Ideally, what we want to have happen is to keep the prices in the center of our profit graph, or at least adjust it so that we can continue to have a nice profit area here, before expiration.
Here’s the issue that you have when you do any kind of vertical spread, or condors, or even if you’re doing calendars, or anything like that. That is, you can adjust it maybe once. Remember, I told you to try not to over-trade, as much as you can. In other words, you might make one adjustment on a position, 30 to 40 days before expiration. After that, you really can’t do any more adjustments. The premium just isn’t there.
Calendars are great for adjustments, because you can always do an at the money calendar. You have some premium there, at the money, right up until expiration. For the most part, it’s very difficult to do adjustments more than one time. Normally, if the price goes against you immediately after putting on a positive Theta trade like this, in which you’re doing calendars, double calendars, or vertical spreads of any kind, that’s about all you’re going to get a chance to do. If it goes against you immediately, you’ll get a chance to adjust. As you get closer to expiration, it’s almost impossible to adjust.
That’s why this is kind of interesting. I call it Theta scalping. It’s just like Gamma scalping, only it’s a little different. You’re basically doing the same kind of strategy. You’re going to be taking a look at your Deltas. Just like with Gamma Scalping, you’re going to be taking a look at your Deltas, in order to become Delta-neutral. You are becoming Delta-neutral with a purpose. That is to keep the maximum amount of profit potential going in your trade, as much as you can.
You can see that the price is right here, right now. In order for us to get Delta-neutral, what do we have to do? If we’re negative 248 Deltas, that means that we are short 248 shares of stock. In order to neutralize that to zero, what would we have to do?
One thing that we can do is go into our Trade tab here. We can try to pick up some Deltas. If we go back here, we can take a look at this. We need to pick up 248 Deltas. How can we pick up 248 Deltas without cutting into our Theta? We don’t want to cut into our Theta, but we do want to neutralize our Deltas.
We’re slightly negative Vega, too. If Vega goes down, we make money. If Vega goes up, which usually means a dropping stock market, that means that we’re going to lose a lot of money. I’m not too worried about the Vega, at this point. These are September options, and the current date is August 7.
I’m not worried about Vega too much. I want to keep my Theta. Obviously, this is how we make money in this trade. We keep Theta as high as possible.
What we want to do is neutralize our Deltas. We want to get back to the center of this graph, somehow, where most of the money is made in this trade. There are a number of things we can do to neutralize our Delta. If we go over to the Trade tab here, we can take a look in – we’ve got these positions on for September. But there’s nothing to say that we can’t use August options, which still have 8 days left until expiration, in order to neutralize our Delta.
The only problem with the utilizing August expiration options, with a position that is going to expire in September, is that we may not be able to find the Deltas that we need. We need 250 Deltas. If we wanted 250 Deltas, we could always buy three of the August 44 calls. They have a Delta of 85. If we bought three of those, three times 85 is about 240.
Let’s try that. Let’s go over here and select. We’re going to buy three of those. Let’s go over and analyze this as a duplicate trade, and see what it does to our graph.
It does get us back into a neutral Delta position, doesn’t it? We’re at 11.44 Deltas. We were at -248 Deltas. Buying three of the 44 calls, with the 85 Deltas, does put us back into a Delta-neutral position. What does it also do?
Number one, it severely restricts the amount of money that we can make. Let’s take a look at the green line, which is our expiration line. At expiration, we’re going to make $3440, right at the peak. If we buy the August 44 calls, how much can we make, if we keep this to the expiration of that call? Only $404. It severely cuts into our Theta, doesn’t it?
Let’s do that again. Take a look at our Theta. It’s $3278. Buying those three calls puts us to Delta-neutral, but it also cuts into our Theta quite a bit, and also reduces our profit graph.
It’s an option. We can do that.