The markets have been offering plenty of downside. I have several traunches of short puts as the initial component to the covered strangle in my core allocation. I recently needed to adjust some ITM short puts and this is another tranche that required management.
For an in-depth review, you can check out this video. Otherwise, read on below for the breakdown!
Let's start with an overview of IWM, this is a 1 year daily chart:
These trades are part of the core allocation of my portfolio and I'm running the covered strangle (CS). These puts are cash secured, however, with a longer-term bearish outlook for the market this year, I'd like to try and manage my basis effectively. Meaning, I don't want to get assigned too early in the event we experience an actual bear market (which last on average 290 days). I am very lightly allocated in my entire portfolio, less than 20% utilized and my core holdings make around 14% of that. I have 5 other tranches out at varying expirations, strike, and sizes. I am purposefully leaving plenty of room to manage into a prolonged downmove. Finally, as I take winning core trades off, I am NOT adding additional trades immediately. I do this so I can add risk in managing some of these deep ITM options, to more aggressively adjust my strikes vice managing the positions separately. Adding risk as part of a trade management is EXTREMELY delicate and can quickly turn into throwing good money after bad, it's important to have a strategy. This is a primary reason I trade the CS on index ETFs or SP500 stocks that I am willing to hold for 5+ years if necessary.
Breakdown of trades:
T1: 11Jan, STO (5) 25Feb 206P @ 3.75
$1875 credit received
T2: 23Feb, BTC 206P @ 9.24
-$2745 realized loss
T3: 23Feb, STO (8) 18Mar 192P @ 4.70
$1015 Unrealized Net PnL (-$2745 + $3760)
My breakeven for this roll is when the 192P are trading at $1.27. This is important to remember when rolling options. We can see a large gain, say if they're trading at $2. However, to actually cover the cost of the roll, I need the premium at $1.27. Anything above that is profit.
By adding (3) additional contracts, I was able to move from a -1.00 delta deep ITM option with 2 DTE to a 0.38 delta OTM option and most importantly, reduced my basis 14 points, from 206 down to 192. I rolled out right around 3 weeks. I do this to remain sensitive to price and subsequent drops. I can always go further out in time for a larger credit or to more aggressively manage the strike. I do this time to time when I do NOT want to add more risk to the trade but wish to adjust the strike. This movement is part of a much longer-term holistic approach to trading the CS in IWM.
To be an outlier, we gotta have a plan.