MANEJO PUT ITM

Summary

In this advanced options trading tutorial, Stephanie explores the concept of *manejo de posição* (position management) as an alternative to traditional rolling strategies. She explains how to adjust deeply in-the-money (ITM) positions without increasing risk, offering a practical example with Vale 3 options. The strategy involves creating new positions that can mitigate losses, reduce risk by 30-50%, or even generate profits if the market rebounds. Stephanie emphasizes the importance of understanding delta, break-even points, and risk management. This approach offers traders a more nuanced method to handle difficult options positions.

Takeaways

• 😀 Position management is an advanced options strategy used to manage positions that are deep in-the-money (ITM) and prevent large losses, without relying solely on rolling over the contract.
• 😀 Rollover refers to moving the option's expiration date or strike price, while position management involves adjusting a position to reduce risk without increasing it.
• 😀 The goal of position management is to salvage a trade without increasing the existing risk, often by creating a new position with a calculated strike and expiration structure.
• 😀 A proper position management strategy may reduce your current exposure by 30 to 50 percent, potentially recovering some losses without adding risk.
• 😀 Stephanie provides a real-world example using Vale3 options to demonstrate how position management can work in practice, involving complex strike and expiration combinations.
• 😀 The key principle in position management is to avoid increasing the risk. All adjustments should aim to reduce the exposure or limit the damage of the current position.
• 😀 When managing an ITM position, using a call option spread (a bull call spread) can help hedge against further loss and may even generate profit if the underlying asset bounces.
• 😀 The setup of a call spread in the example is done in a way that the trader does not need to pay upfront for the new position, essentially making it a cost-neutral strategy.
• 😀 Three possible outcomes can occur when applying position management: no change (if the market continues to fall), a reduction in loss (if the market rebounds), or profit if the asset moves in the favorable direction.
• 😀 The concept of managing risk through position management is explained in detail, emphasizing that no strategy is foolproof, and it’s essential to continuously calculate the risk exposure when adjusting trades.
• 😀 Advanced strategies like position management are crucial for experienced traders, and Stephanie’s course provides in-depth training from basic to advanced techniques, with a focus on practical applications of these methods.

Q & A

What is the main focus of the video?

The main focus of the video is on managing options positions, specifically when a sold put option becomes deeply in-the-money (ITM). The video explores alternatives to the traditional rolling strategy, offering a more advanced approach to position management.

What is the difference between 'rolling' and 'position management' in options trading?

Rolling typically involves adjusting the expiration or strike price of an option, while position management goes a step further by creating a new position to manage the risk of an existing trade. The goal of position management is to attempt to resolve a losing position without increasing risk, unlike rolling which often only delays the risk.

Why is position management considered an advanced strategy?

Position management is considered advanced because it requires a deep understanding of option pricing, delta, and the risks involved. It involves creating new structures to reduce risk while attempting to salvage a position that has gone against the trader, without increasing the overall exposure.

What does the term 'Delta' refer to in position management?

Delta refers to the rate of change of an option’s price with respect to changes in the price of the underlying asset. In position management, understanding delta is crucial as it helps in adjusting the position and choosing the right strikes for new positions to balance the risk.

What is the 'Delta of Transition' and why is it important?

The Delta of Transition refers to the adjustment in delta when transitioning from one position to another. This is important because the transition delta helps determine the effectiveness of the new position in managing risk, especially when trying to counteract a deeply ITM option.

What is the scenario presented in the video for managing a put option that is deeply ITM?

The scenario presented involves a sold put option with a strike price of R$76.50, while the underlying asset (Vale 3) is trading at R$68.40. The trader’s position has a notional value of R$76,500 and a current loss of R$8,100, which requires managing the position without increasing the risk.

What is the purpose of creating a new position in the scenario of a deeply ITM option?

The purpose of creating a new position is to reduce the risk associated with the original sold put, potentially by using strategies like buying and selling calls to finance a new structure, which can help to offset the loss from the original position.

How does the new structure help manage risk in this scenario?

The new structure helps by potentially offering a zero-cost or low-cost solution that allows the trader to benefit from a price rebound in the underlying asset. The strategy also aims to ensure that any risk in the new position is smaller—by at least 30-50%—compared to the original loss.

What is the expected outcome if the underlying asset experiences a price rebound?

If the asset rebounds, the new structure could become profitable, with the potential for the trader to make a profit as the asset's price rises, thus reducing the risk of the original position. The new structure is designed to provide a gain if the price moves within a certain range, which helps to counterbalance the original loss.

How does the 'break-even' point work in the newly created structure?

The break-even point of the new structure is the price at which the trader neither gains nor loses money from the new position. If the asset price rises to the strike of the original sold put (R$76.50), the trader will break even, with no further losses but no profits from the new position either. The structure’s maximum gain is limited to the price range between the bought and sold strikes, providing profit potential within a specific price range.

What are the potential risks if the asset continues to decline after the new structure is set up?

If the asset continues to decline significantly, the newly created structure could lose its value, potentially resulting in the trader’s position becoming more exposed to risk. However, if the asset stays within a manageable range, the position could provide a hedge and minimize the initial loss.