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Hello, tradeologists. We did our analysis over the weekend. We came up with two potential
stocks: Netflix, XLF, and Avon Products. We eliminated Avon Products, although we're going
to keep it in the back of our mind, for potential Gamma trading in the future. We're going to
go with Netflix. We calculated the at the money straddle at $2.80, over the weekend.
This is Monday morning, and the current straddle at the money is $2.50. You can see that, just
over the weekend, we lost 30 cents on this straddle, or $300 on a 10-contract straddle.
You need to be able to pick a stock that will trade fairly actively, in order to counteract
the Theta decay that the stock is going to experience, as we get closer to expiration.
Let's go over to our Analysis tab for a second. Every single day that goes by, in which the
stock does not move, we will continue to lose $63. We're getting closer to expiration. This
is going to be significant in how we make money. What we need to do is, when we do place
this order, we need to carefully consider the Theta decay, and the current chart. Let's
take a look at a current chart.
This is a 60-day, 60-minute chart. We only have 18 days left until expiration. We do
want to get close to that expiration date. We want to be able to do this closer, because
Gamma, at this stage, is highest right at the money. It does affect our Delta. We want
it to affect our Delta, so that we can trade in and out of the stock.
Let's take a look at this particular trade on the chart again. Since we only have about
20 days, which is this period right in here, that's approximately 20 days of trading. You
can see it's moved pretty well. There have been some opportunities, here. What we want
to be able to do, of course, is get into this trade, and then manage and trade these swings.
I'll go ahead and enter the trade. Immediately, you can see in the Analyze tab, that we are
long 179 Deltas. In order to get this to Delta-neutral, as soon as we put the position on, we have
to sell 179 shares.
This is where it really gets interesting, at this point. What I would like to do, rather
than using the standard mode: I like to go to minus $2 and minus $5 for price slicing.
What will happen to my Delta, if the price of the stock moves up by $2, or moves down
by $2? I like to set it at $1 increments, so I can go over here and set these at $1,
rather than $2 increments. I'm going to set the $5 at $2.
Let's see what happens to our Deltas, as the price of the stock changes by $1. This is
really important, when it comes to determining the Delta of your position. If the stock moves
up by $1, you're going to be long 406 Deltas. You need to sell 400 shares at $28.97. If
it drops to $27, you're going to be short 79 Deltas. At that point, you need to buy
80 shares, in order to get Delta-neutral.
We start out with a position that is long 177 Deltas. We need to sell approximately
170 shares, in order to get fairly Delta-neutral on this position.
What we're going to do is go over to the chart. We'll open up Netflix. We are going to sell
170 shares of stock, in order to start out our position. That will bring us to a Delta-neutral
position. Now, we know that if the stock moves up 1 point, we are going to be long 231 Deltas.
If it drops one point, we are going to be short 262 Deltas. At those points, we need
to sell. If it moves up a dollar, we need to sell 230 shares. If it drops to $26.95,
we need to buy 260 shares. Remember, we're already short 170, so that will affect our
Deltas as well.
We're going to go ahead and enter this order. We're going to do "First triggers sequence,"
because we want our straddle to be entered first. We have to get into that straddle,
before we actually get short the stock. Let's go ahead and enter that.
Evidently, Netflix is not available to borrow. We are going to have to pick another stock.
You can look up here. It says "Hard to borrow." Our order was rejected, because we cannot
short the stock. It's very hard to borrow.
I guess we're going to have to go to our second choice, which is Avon Products. That does
happen, once in a while. Let's go to Avon. Right up here, it does say "Easy to borrow."
Hopefully, we'll be in a better position to trade Avon.
Let's take a look at their chart again, over the last 20 days. This has also moved fairly
significantly. In fact, it's up quite significantly right now: 41 cents for the day. Let's take
a look at the current straddle. The current straddle is $3.23. Let's just make sure that
this is the cheapest straddle we can buy.
We'll go down to the 30s, and we'll go up to the 40s. It looks like the 35s are the
cheapest. Let's go over to our Analyze tab. This is real-world. We went to do the Netflix
trade, and we found out that it's not very easy to borrow the shades. Especially with
the new regulations on shorting stocks, you do have to borrow the stocks. Of course, retail
investors always had to do that.
With this position, we are long 400 Deltas, on our straddle position. In order to get
Delta-neutral, we are going to have to sell 400 shares.