How I finesse my trades

I follow my trading plan with discipline, that is one of my secrets. However, there are some subtle things I do that I call “finessing my trades.” These are little tweaks and techniques that I use to allow some trader intuition without violating my trading plan. They are not required for the plan to work, but they can help squeeze a few more dollars out of the market without adding unnecessary risk.

Moving the calls in closer

By default, my plan suggests selling the 10 delta call and put. However, I will sometimes push the call down to 12-14 deltas.

You see, a lot of premium sellers like to carry negative overall portfolio delta, to offset losses on their positions when the market goes down and volatility expands. So they add a separate hedge, such as selling calls on the S&P 500, or buying puts.

I have never had a good experience with adding these hedges. They always create too much drag. However, sometimes pushing the call down a little on the strangles does add a very subtle premium sellers hedge without creating noticeable drag.

Transitioning from low volatility to high volatility

Premium sellers claim to like a high IV market, but if it suddenly arrives after a period of low IV, there is often panic. The positions they have on are suddenly showing significant losses due to IV expansion, and they don’t have extra buying power available to take advantage of the newly expanded premium. Otherwise, they might have kept usable cash on the sidelines, but that often means waiting for an IV spike forever without the money earning anything.

So I have some finesse I use to help this low IV to high IV transition. First, I will start taking all small winners off when there is a big increase in volatility. The mindset here is to not be married to any particular position. While I don’t want to lock-in any losers, taking small winners off will free up buying power to be put to use on a better trade that is likely to benefit from the IV spike.

Another method I use to help take advantage of a new IV spike is to look for existing positions that have much less days till expiration than I usually start with, and roll them out in time. This not only improves the cost basis of the position (more credit taken in), but it increases the vega of those positions–so when IV calms down, they have a stronger increase in profitability.

Those are a couple of the ways I add finesse to my trading. I will be sure to post some more tips soon.

Trade smart.

J. Arthur

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10 comments on “How I finesse my trades

  1. PEDRO MIGUEL GUERRA

    excellent! thanks

    Like

  2. Great post. Do you follow any news in your trading plan, or you just go by numbers?

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  3. Daniele

    Hi Arthur, good day
    while rolling , are you keeping the same strike or are you looking to go again for the 10 delta? And are you rolling to get again the 150 days or also more?
    Thanks hanks for your kind reply

    Like

    • I keep the same strike. I prefer not to roll past 150 days, but will if there are no other choices.

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      • Hi Arthur,

        If you roll them out at the same strike during IV spike, the delta of each leg tends to become much higher than 10. Do you still roll them out anyway? What about the overall delta of the roll-out strangle? If it deviates from delta neutral too much due to the sink of underlying price, still rolling out?

        Thank you!

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      • I will still roll out even if the delta becomes higher at that strike. At that point I am happy to collect more inflated premium from higher IV.

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      • Daniele

        Hi Arthur and thanks for the explanation.
        I have a practical question: if you defend the position for 3 times already ( 20-40-50 deltas) getting on a quite tight strangle, but still having 70 DTE and a negative overall P/l of 30% ( and not yet reached the 2x loss for the initial credit): would you roll the tight strangle back to 150 DTE for a quite high credit ( due to the high current volatility) or wait to get to the 50 DTE?
        Thanks advance.
        Ciao
        Daniele

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      • It is extremely rare that I have a position which reaches 70 DTE without either hitting my profit target, or hitting a loss prevention situation. If it made it that far, I’d wait until 50 DTE and just take it off then, regardless.

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      • Daniele Rossi

        Thanks a lot Arthur. As usual very fast and to the point!
        Best Regards
        Daniele

        Like

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