First $SPY Campaign Was a Wash

The first trading week of 2021 is in the books.

While the week was good for established positions that my All Star Options subscribers are enjoying, my little experimentation with $SPY options wasn’t as satisfying.

Thanks to a well-timed midday slump in stocks today, I was able to exit the entire position for basically a net scratch after commissions. So if there is a silver lining, that was it. Otherwise, there were a bunch of trades, and a lot of chasing the market higher as my short calls kept needing to be defended. I did short videos each day this week, showing me making these trades.

While I don’t think this strategy is a bad idea, it took actually trading it to learn that it might not be right for me. I don’t like the feeling of watching short options go in the money and having to endure any worry that the market might go on an extended run, punishing by position in the process. That leaves me feeling like I have no control of the situation. I don’t like that feeling.

Yes, my risks were defined and I knew the maximum I could lose, but playing defense every day felt like more of a battle than I’m in the mood for. I want to be operating in the flow of the market, not fighting against it.

So I closed the position for a clean slate (more below).

Here’s is the video I recorded as I closed up this campaign:

After closing this all up, then making myself some lunch, and then busying myself with other day job work-related tasks, I starting building a position near the close of trading for my next campaign that I’ll start video-ing next week. I purchased ATM straddles in each of the next four expiration series (Monday 11th, Wednesday 13th, Friday 15th, Tuesday 19th).

This left me with a delta-neutral, long gamma position which I feel is the stance I need to be taking in the foreseeable future as the stock market looks to me like we’re at an inflection point. I don’t know which way we go next, but I’m willing to bet we either go way higher (further punishing bears calling for the end of Western society), or we see a meaningful dip in the next 4-12 weeks (pulling the rug out from all the Johnny-come-lately hot money hands piling into every uptrend). In either scenario, a delta-neutral and long gamma position should benefit (more so on the downside).

The trick, or art, will be in managing the theta decay impact inherent in holding long options.

My initial thinking is to keep it simple.

At times when my P/L is positive (meaning the value of options is rising), I’ll be a seller of options — closing long options from my existing inventory to bring my deltas back to neutral. At times when my P/L is negative on the day (options values are declining), then I’ll look to be a buyer of new options in back week expirations to realign my deltas to neutral. Buying when options are “cheap,” selling when they are “inflated.”

Having a neutral delta position makes me ready for anything. Up or down, I don’t care. I just want the market to move. And being long options means I’ll be in position for theoretically unlimited gains in any truly epic moves, while having clearly defined risks when the markets aren’t as accommodating (I can’t lose more than I paid for the long options). And since I’ll be buying calls when my delta becomes negative as the market declines, and buying puts when my delta becomes more positive as the market rises — I’ll be “buying low and selling” high. This is a process known as gamma scalping. Though, typically gamma scalpers buy and sell the underlying stock to keep their deltas in line. Maybe this is what I should be doing? I only learn by doing.

We’ll find out.

If any of this interests you, I hope you’ll follow along with these videos (I keep them under 10 minutes long) and subscribe to my youtube channel.

Have a great weekend, and Go Bills!