Trading Epic Fury (Part 15)

Aside from using TA, another way to get positive delta (NPD) is simply to respect the stop-loss.

I use a stop-loss with most of my trading to exit positions that go against me. If I sell a put [spread] for $3.00, for example, then a 3x stop loss means I would close if it increases to $9.00 or more. (6) here illustrates a sample strategy.

Perhaps because I don’t sell calls very often, I generally do not use an upside stop-loss. When I “campaign,” I look to roll out and up for a credit as expiration approaches. I also watch the portfolio greeks (i.e. the “net position” aspect of NPD or NPV discussed in Part 14). In a typical market with positive drift, I’m okay holding DITM short calls as long as NPD is positive, which I have done most of the last few years.

Closing short calls increases NPD by effectively buying the call: a positive delta event. Respecting the stop-loss does this.

The consequences of campaigning (no stop-loss) can be shocking when studied in isolation. Recall (3) from Part 7. The 2 DTE 6400 calls were sold for $21.30. While most have since been closed, a couple have been campaigned and now sit at the 6500 strike priced ~$910: an unrealized loss over 25x including a few rolls to capture additional premium!

The potential savings realized by respecting the stop-loss and closing everything the very next day is staggering. I mentioned a “windfall” in the fourth paragraph of Part 14 by getting positive NPD near the right chart arrow of Part 12. Now I’m entertaining the idea of getting positive NPD at the left chart arrow with SPX even lower [by ~40 points].

Caution is warranted, however, as NPD would be much greater after closing all the stopped-out calls. That represents significant risk in case the unidirectional rebound (V-bottom) does not materialize—and right on the heels of a big losing day, too (albeit not as bad as two days prior).

There is no easy, guaranteed answer.

As I go through the analysis and tab certain concepts for inclusion on a daily trade management checklist, one challenge is to avoid conflicting guidelines. Remember the penultimate guideline here that might have had me closing 50-100% of the position after this day [“two days prior” from two paragraphs above]. The consideration about respecting stop-loss would be largely moot [and I would have been in the catbird seat just 2% off my equity ATH where getting positive NPD after the left or right arrow could have subsequently added further to profits].

Beware of 20/20 hindsight. I don’t want to think I could do anything heroic that would have seemed murky in the moment.