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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1 comment on “How I finesse my trades

  1. PEDRO MIGUEL GUERRA

    excellent! thanks

    Like

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