Saturday, May 8, 2010

05/07 NDX Iron Butterfly – MAY/10

Ok, let me start by saying, what a ride!!! As we opened up this morning my instruction was: look for ways to cut and roll the short puts that are hurting the position. Let the P/L settle down and go for it at the best possible price. Just in case you didn’t read my daily summary and are reading this post isolated, let me make one note: I didn’t go super bearish with my put hedge, quite the contrary, I actually adjusted it this morning to be slightly less bearish (in case of a whipsaw)

Realizing I could not cut and roll (none of my orders were being picked up), I had to sit back and wait a bit longer. I had a contingent order to hedge the trade if we traded at or bellow 1870. Sure enough, we started to go that route and it quickly hit my contingent order.. The market started to roll over once again and I noticed my hedge had given me an opportunity: Negative delta and positive Vega. Perfect Nitro combination for the morning price action

Within about 30 minutes we were crashing, panicky put buyers kept pumping Vols higher. I saw the P/L was jumping around the profitable zone. So, my first reaction is: “CLOSE”.. Then off course, I realized it wouldn’t be this simple, it would be like disarming a bomb, one wrong click could set me up with the wrong delta exposure, given the market’s speed I could be toast quicker than you can say “toast”. So, I took a deep breath and analyzed the exit sequence: Eliminate the delta hog, sell the long puts ASAP for their overpriced value (Vol hyped value) and keep your Greeks under control. I closed my first vertical with the short 1950 puts, and dumped my two long Jun puts. At that point my Greeks were basically FLAT, no delta, no gamma, positive theta and small vega.

What happened was that I had rolled 2 of my short 1950s Yesterday, once I closed the 1 remaining vertical, I then Had 3 short call verticals and only 2 short put verticals. Because I locked in gains from my previous transactions, thanks to those over-priced puts, I was simply navigating flat with profits locked in. Because you never know if those profits were only due to expanded bid/ask spreads, or whatever reason, my next step was to close all short PUTs, balance the remaining trade and leave only one short call left (2050 call) alone. I might dump everything on Monday just to be fully relaxed, but you know, I’m not afraid if it starts rallying up again. Remember the kids in the roller coaster? :)

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