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  • Questions about the Greeks

    December 17, 2009 by  
    Filed under Double Calendars, Iron Condors, The Greeks, Theta Scalping

    QUES: In your trading experience with both the iron condors and double calendar spreads have you found it any more advantageous to theta scalp if I have time daily to monitor?

    ANS: I don’t theta scalp a double calendar or an iron condor since they already have long calls or puts that protects your position while theta is collected. I will typically only theta scalp by selling a straddle or strangle. Then buy or sell the stock or etf to offset the delta/gamma risk.

    QUES: My own experience is that theta scalping (even at 250 or 300 delta
    intervals) have not routinely produced _greater profitability_ vs adjusting via spreads near/around the break-even zones.

    ANS: I agree. It is not as profitable as adjusting spreads at break-even points.

    QUES: I am a very active gamma trader and have been employing my own gamma/theta/volatility algorithm to adjust my gamma positions.

    ANS: I have recently been using a formula that has helped determine when to adjust deltas based on volatility and estimated moves of the stock rather than intervals of 250-300 deltas. I have found it to be excellent. Feel free to test it for yourself.

    I’d be interested in your algorithm, if you’re willing to share.

    The formula I’m using is simply this: E= ([V/16]*St)*R

    16 is the sqrt of 256= the average number of trading days in a 1 year period.
    V= Volatility (expressed as a percentage), E= Estimated Move of the Stock or ETF on any given day, St=Stock Price, R=Risk Tolerance (the amount of risk you want to assume above an estimated one day move in the stock before hedging deltas. This can be 1,2 or 3 or 4. I don’t recommend a R value above 4)

    If I was selling a straddle:
    V=.2054
    St=50.00
    R=2

    Then
    E= ([.2054/16]*50)*2
    E= 1.28

    So, on this day, I would make an adjustment only after a move of 1.28 based on a R value of 2 on the stock or etf on that day and recalculate for the next day based on price change and volatility change.

    Closing is easy. I close the position when the theta collapses.

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