Use the Analyze page
on thinkorswim from
TD Ameritrade to
stress-test your hedge
ideas. Click the wrench
icon in the Positions
and Simulated Trades
section to adjust the
price of the underlying
or option volatility to
view various "what if"
scenarios.
you can’t make markets and you don’t see the order
flow coming into the pit. But what you can do is bias
your trades a bit. Let’s say you have positive or long
vega in your portfolio because you’re long a bunch of
calendar spreads. If volatility is lower, calendar spreads
would be less expensive. That might fit your trade crite-
ria, but if you bought more calendar spreads and your
vega became more positive, then you’d be adding to
your risk if volatility dropped. You might want to pass
on buying more calendars. Instead, maybe you’d look
to sell iron condors that have a low delta and negative
vega. At lower volatility, the credit for iron condors
would be lower, so you might not do too many of them,
but they would partially offset your portfolio’s positive
vega. If you were going to make a directional specula-
tion, you could sell a vertical—call or put, depending on
your bullish or bearish bias—which would create deltas
and negative vega. Alternatively, you could roll some of
the short front-month options in your calendar spreads
to a further expiration. That would reduce the amount
of positive vega in your portfolio.
SEE
GLOSSARY
PAGE 46
DIVERSIFICATION HAS A SIMILAR MEANING for both
traders and investors. Either way, what you’re really
doing is keeping your portfolio nimble. However,
“investing” for the short term, as traders do, requires a
different set of skills than simply understanding correla-
tion between stocks, bonds, and cash products to
weather a storm. With practice, you can finely tune the
risk of your options portfolio to match your
risk tolerance and any speculative bias you
have. This will also let you structure your
portfolios with more discipline. Rather than
entering trades as discrete speculations,
you see any individual trades as pieces of a
broader portfolio. Any new trades would fit
into and change the portfolio a certain way.
BET YOUR BOTTOM BETA Hey, how much risk do you have in your trading portfolio, and how will you hedge it? Don’t know? A slick little tool traders have with thinkorswim from TD Ameritrade is the beta weighting feature. This tool takes the total delta of your portfolio and converts it into individual positions on a stock or index that’s optionable, such as DJX or NDX.
To find the beta-weighting feature, launch your thinkorswim from TD Ameritrade platform, then go to the Monitor page. On the right side, under Position
Statement, check box next to Beta Weighting. Type in the symbol of an
optionable stock or index. The numbers in the delta column are the hypothetical equivalent of the stock or index you entered. To hedge this, if the number
is positive, you would short deltas in the stock or index. If it's negative, you
would buy deltas.
• The information contained in this article
is not intended to be investment advice and
is for illustrative purposes only. Diversification does not eliminate the risk of experiencing investment losses. Spreads,
straddles, iron condors, and other multiple-leg option strategies can entail substantial
transaction costs, including multiple commissions, which may impact any potential
return. These are advanced option strategies and often involve greater risk, and
more complex risk, than basic options
trades. Be sure to understand all risks
involved with each strategy, including commission costs, before attempting to place
any trade. Be aware that assignment on
short option strategies discussed in this article could lead to unwanted long or short
positions on the underlying security. Clients
must consider all relevant risk factors,
including their own personal financial situations, before trading. Options involve risk
and are not suitable for all investors. Supporting documentation for any claims, comparisons, statistics, or other technical data
will be supplied upon request.
