At this point, I could adjust for my Deltas. I could buy 200 shares of the QQQs, at this point, and adjust. However, in Gamma Scalping, you want to adjust as much as possible, so you can scalp profits from the stock. In Theta Scalping, you want to wait a little bit longer. You want to wait until the Delta is maybe 250, even 300, before you make your first adjustment. You don’t want to have to adjust too much.
The reason is, if you do go ahead and buy 250 shares of the QQQs now, in order to adjust your Delta, and it moves downward, you’re going to lose money on your stock. Of course, you’ll be Delta-positive, so that you’ll be able to collect that money every single day. You’ll probably more than make up for it. But if you do adjust and it goes down, you’re going to lose a little bit of money on your position, because of the long stock that you have.
You don’t want to adjust too much, with these types of positions. When it starts to get to a point where it’s 300 Deltas, I would definitely adjust. If this price doesn’t move back in line tomorrow, then I’ll go ahead and adjust it. I’ll probably buy a couple hundred shares, in order to get it to a relatively Delta-neutral position.
That’s exactly what we do, when we Theta scalp. We want to keep this in a Delta-neutral position, so we can collect the maximum Theta, every single day, and be in a profitable position all the way until expiration. The closer that we get to expiration, the better, when we’re Delta-neutral. As we get closer and closer to expiration, our white line continues to move.
The nice thing about this is – let’s say we’re in September 10, and we’re only 7 or 8 trading days from expiration. Right now, we have a profit of $2125 on the position. We’re 359 Deltas short. If we want to, we can go in and purchase 300 shares, in order to get us back to Delta-neutral. The nice thing about this is that we can do this right up until expiration week.
Remember, I told you that price in the last week of expiration is the most critical component, and the one risk that you have, going into expiration week, when you’re holding calendars, double calendars, etc. When you adjust the stock, you can adjust your Deltas anytime you want, and bring them back to Delta-neutral position, in order to collect the maximum amount of Theta, just before expiration.
Let’s say, right now, that we have about 7 or 8 days before expiration of the September options. I currently have a profit of $2047. My maximum profit is $3099. It came down a little bit, because I bought the stock.
But that’s still $1000 difference. If I needed to adjust, let’s say the price went up, or it went down a little bit. We would look at an investment on the upside. It went down a little bit, and I’m 458 Deltas long.
What I could do is simply sell off my stock, and that puts me back into a Delta-neutral position. Now, I’m collecting close to $90 a day in Theta, as I get closer to expiration. Let’s say it moves up a dollar, which is a pretty big move, for the QQQs. I just showed you that it was about a 300-point move on the Dow, and the QQQs only went up by $1.
Now I’m slightly off Delta. I’m actually -402 Deltas. I can adjust by buying 400 shares of stock. If it really doesn’t move, I haven’t lost any money on the stock, but I continue to collect Theta. The Theta gets larger and larger, the closer it gets to expiration. Now it’s $100 a day. That gives me confidence to hold the position right into expiration, collecting the maximum amount of Theta, and the maximum amount on the position.
We did lose a little bit of money by adjusting our position with stock, but not as much as we did if we had put on calendars to adjust. Plus, it would have been extremely expensive to adjust with calendars. Remember, we had to put on 45 calendars in order to get back to Delta-neutral one time.
With stock, you can continually adjust your Deltas back to a Delta-neutral position, so you can go right into expiration with your position – as long as some of your short positions aren’t in your money, which creates other risk.
For example, being assigned. You can get relatively close to expiration, using this method of Theta Scalping with the stock, in order to get Delta-neutral. By that way, you can collect as much as you possibly can from the Theta. It’s not as active as Gamma scalping. With Gamma scalping, you really need to be there every single day, to take advantage of the price movements in the stock, in order to scalp the profits out of the stock, as it moves around the Delta.
With Theta scalping, you wouldn’t have to look at it very much. In fact, I barely look at it more than a minute or two a day, just to see where my current Delta position is. In fact, on this position that I’ve had now for over a week, I have not adjusted it even once. We are slightly short Delta, and if I need to, I’ll go ahead and purchase 300 shares of the stock, once it hits -300 Deltas. That’s about all I’m going to have to do for quite a while, unless the index gets extremely volatile, and it’s moving up and down a point a day. I’ll just let it move up and down a point a day, because it doesn’t make any difference to my position.