A team member pitched me an intriguing options selling system. It involves super short-term options and delta hedging. Here’s my review:

Bear Tamer

• Concept: Protect a long stock position against crashes.
• Structure: Buy 100 shares of stock, buy long-term puts, sell short-term covered calls. Diagonalized Collar

Nice summary Tyler. But how about the Bear Lover? Rather than just taming the Bear, why not embrace it?

SPY, IWM, QQQ, DIA

Bear Lover

Here’s one way:

1. Wait for an inter-day peak on one of the aforementioned ETFs.
2. Sell a call 1-2 days from expiration to lock in rock-star theta & some negative delta
3. If the ETF price rises afterward, scale into a position as needed, say 25 shares at a time.
4. If ETF price continues to rise, increase stake to 100 shares at short strike.
5. If the short call goes ITM, roll up & out
6. Place stop loss for shares at break-even
7. Wait for the short call to expire OTM, or let your shares be taken away if ITM, rinse & repeat.

I forgot to include buying the put option if you reach 100 shares. Another variation is to only buy 50 shares, then accepting the risk of getting into 50 shares short position if you allow call to expire ITM. When you also buy the put, that creates an open risk graph to the downside (i.e., no loss on price drop).

Tyler’s Thoughts:

1. Use IWM on the 5-minute chart
2. Sell 1 to 2-day OTM naked call option, high theta, negative delta
   1. High gamma risk trade. Win quickly if right, lose quickly if wrong.
   2. Sell 1-day IWM $191 call for 42 cents, stock is at $190.
3. As the stock rises from $190 to $191, incrementally buy shares to delta hedge
   1. The pro of delta hedging is you keep the directional exposure close to zero.
   2. The pro of keeping the delta close to zero is it makes this more of a THETA play. Delta neutral/ theta thief.
   3. Con = Expense of buying 100 shares of stock is $19,000. The potential profit over the next day in the short call is $42.
   4. Con = time intensive. You are adding positions every 30 cents. Micro-manage required.
   5. Con = Whipsaw. What if I add 25 shares when the stock rises another 30 cents? Then stock falls 45 cents. Call premium represents the target I’m shooting for. Only $42. What if by an ill-timed hedge or bad luck, the stock quickly reverses and I lose $100 on my delta hedging with stock?
4. ETF continues to climb, I get long 100 shares by the time we’re at a short call strike.

Read more Options Theory [FREE Content]

Every Thursday our resident options addict, Tyler Craig, will be at the helm to help you demystify derivatives and better understand what truly makes them tick. Options for beginners? Come this way, please. Enlightenment awaits.

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