Buying 100 shares of the QQQs is going to cost us a $5 commission. It’s also going to reduce our buying power by $2300.
That’s the cost of doing business. In our Theta scalping trades, we have just the opposite goal. The goal is pretty much the same. We still want to make money. Another goal that’s the same is that we want to be Delta-neutral. Bringing the current price to a Delta-neutral position helps us align ourselves with the maximum profit potential of this position.
Let me say that again. Bringing ourselves back to a Delta-neutral position helps us align ourselves with the maximum profit potential of this position. In order to get Delta-neutral, if we are -248 Deltas, what do we have to do to get Delta-neutral?
We have to buy approximately 250 shares of stock. That’s exactly what we did. In this case, rather than buying 250 shares, I’m going to buy 200 shares, and stay slightly negative Delta. It doesn’t have to be perfect.
200 shares puts us almost directly into a Delta-neutral position, and helps to maintain – it does decrease our maximum profitability a little bit. But what it does is it keeps us in the center of our profit graph. Even if the price were to move – as we get farther up, let’s say we buy 200 shares of the QQQs, and the price moves up to $48.
Let’s take advantage of the Think or Swim platform, and advance the price by $2, to $48. On the QQQs, that’s a big move. Now we’re way over here. Our price has moved to $48.27. We’re currently in a negative Delta position of 456. But we moved from 46 to 48. We’ve made 2 points on our 200 shares that we were long.
The problem is, we’re still not Delta-neutral. In order to get Delta-neutral, we have to go back, and we have to buy some more shares. In this case, we have to buy another 400 shares of the QQQs. Now, we’re long 600 shares, but we’re Delta-neutral again. Again, our maximum profit has been reduced.
However, we are Delta-neutral, which means that for each day that we increase in time, the more money we make, because we are Delta-neutral.
Let’s take this 400-share stock off. If we were not Delta-neutral, we would still be in a losing position. Let’s go back to the current date. We’re currently down $475. In order for us to make any money at all, we would have to advance the date almost to expiration, past the August expiration, about 14 days, just to break even.
By buying these 400 shares, we would be in an immediately positive – we’re in a neutral Delta position that we put ourselves in originally. Now, we have a profit of $688. Let me re-set the time again. I’ll take off both of our stock positions.
We’re way over to the right side of our graph. Today is the 8th. We are in an extreme negative position. We’re losing $823. We’re 656 Deltas short. In order for us to become Delta-neutral, we need to buy 600 shares of stock.
Because we didn’t adjust soon enough – we adjusted a little bit too late, but we still adjusted. We have a small profit here. The problem is that we’re getting pretty close to the end of our graph, at which time, even if the price does start to move up, we’re going to make money, because we’re long 600 shares of stock.
Let me go back and adjust this again. This is our current position. We’re short 248 Deltas. I buy 200 shares of the QQQs in order to get Delta-neutral. Let’s progress time. The price had a big move up just recently. It went from $45 up to $46.27. Now, we’ve bought 200 shares of the QQQs. We are Delta-neutral. Now, for a couple of days, the stock just sits there.
Each day the stock just sits there, we increase our profit for the day by $46, which is our Theta. After 3 or 4 days, we’re still Delta-neutral. The price barely moved around the center. We continue to make money in this position. Now, if the price were to continue to move against us, to the upside – let’s say it goes up one point. Now, we’re 300 Deltas short. We already have our 200 shares long, that we bought back when it was at $46.27. Now, we’re $200 richer, because we’re long those 200 shares, but we’re not Delta-neutral.
Now we have to go in, and we have to buy 300 shares. Now, once again, we are Delta-neutral. A couple of days more go by, in which nothing happens. We are now profitable by $460 in the position. We are long 500 shares of the stock.
If the price continues to move up on us, we become short 231 Deltas. We have already gone from $46.27, all the way up to almost $48.27. That’s $2, and we were long 500 shares of stock. We made money on 2 points, on the 200 shares that we bought at $46.27. We have another 300 shares that we bought on the last point.
Now, we’re short 231 Deltas again. Now, we go ahead and buy another 200 shares. Now, we’re long 700 shares, but we’re Delta-neutral. We have a profit of $677. Once again, the price doesn’t move. In other words, what happens is, every single time that we adjust for our Deltas, we put ourselves in a position in which, as the day goes by, our Theta is working for us, as much as possible.
In other words, if we’re way down here, at $44, we’re losing $1200. It’s going to take us a long time to get back to a Delta-neutral position. It’s going to take us a long time to get back into a profitable position. By adjusting to become Delta-neutral, you put yourself in the center of the graph – not the center of the profit graph, but the center of the current profit and loss graph. Not our expiration graph, the current profit and loss graph. Each day, we can collect the full $40 in Theta that we have coming, for holding this position.