For the third time this cycle, IBM has thrown us a damaging whipsaw. As noted yesterday, anyone with enough capital could add a downside hedge here (e.g., the IBM Mar 155/160/165 put butterfly)—but we can’t assume everyone has such deep pockets. So what we’re going to do for now is roll two-thirds of our calendar hedge at 170 down to the 160 strike, as follows:
Day limit order
Buy to close 4 IBM Mar 170 puts
Sell to close 4 IBM Apr 170 puts
Buy to open 4 IBM Apr 160 puts
Sell to open 4 IBM Mar 160 puts
for a net debit of $0.94 or better.
Note, again, that the 4 contracts specified above represent two-thirds of our current position in the IBM Mar/Apr 170 put calendar. Also note that as a Supplemental Trade, this order will not be autotraded.
Analysis: This week’s day-to-day volatility in IBM reinforces our preference for trading options on ETFs…that said, this month’s Supplemental Trades certainly have provided plenty of valuable learning opportunities. As suggested above, the ideal move here would be to sell volatility by buying the Mar 155/160/165 put butterfly; however, this adjustment trade gives us a similar risk profile without requiring a large amount of additional cash.
We’re reducing our beta-weighted portfolio delta bias from approximately 3% of capital currently at risk to less than 0.6%, with virtually no change in vega in proportion to capital at risk. While this latest whipsaw eliminated our chance of eking out a profit, we’re still in a position to recover much of the paper loss incurred with today’s blindside, as the risk profile below shows.
Our new risk-management thresholds are projected at about IBM $161.35 and $165.40. Because we’re approaching expiration week, and our unrealized loss is in our maximum stop-loss range, our strategy going forward is to manage risk by closing positions. We’ll be giving up some potential gains, but what’s most important is stemming losses before they have a chance to take us out of the game.
NOTE: Supplemental Trades are optional and are primarily intended for more experienced/risk-tolerant subscribers. They are not autotraded, and have no bearing on our core newsletter portfolio; however, we follow up by posting any additional entry or adjustment trades that the Calendar Options risk-management approach may call for. Also note that it’s important for anyone who chooses to participate in Supplemental Trades for a given cycle to follow all Supplemental Trades in that cycle if they wish to match our risk-management profile.