We’ve got a couple things to discuss today, both concerning the VTS Discretionary Strategy.
1) Our CVS trades are expiring tomorrow. For regular stocks and ETF’s monthly options expire on the third Friday of the month. So in April the Fridays fell on the 6th, 13th, and tomorrow is the 20th so at market close our CVS options will settle. And if you’re interested, cash settled indexes like SPX and RUT for our typical Iron Condors settle the third Thursday of the month. VIX options have a somewhat strange settlement process and that happens on the third Wednesday of the month.
Since our CVS short puts are part of a broader strategy that I call the Wheel of Fun strategy, we’re just going to let them expire. Here’s what those trades currently look like:
– If nothing crazy happens in the next day, our 61 put will expire worthless and we’d be in cash. The 1.50$ premium we collected for the trade is always ours no matter and 61 put trade will likely be over tomorrow.
– If CVS stays under 67.50$ (currently 66.07) again we’ll keep the 2.00$ premium for the trade but we will be assigned 100 CVS shares at a price of 67.50$. This was the plan all along, to collect a nice premium and possibly get assigned some shares so we can move on to the next step of the wheel.
– If we get assigned shares then on Monday we will be selling a covered call, likely at the 67.50$ strike. That will bring in some more premium that is ours no matter what, and then we’d wait another month and see where the price is.
– Remember we always use a stop-loss because it’s always possible that the markets crash and take our position well out of the money. We can’t allow them to bleed down too far so we will continue to use the 675$ stop-loss.
So we’re coming into step 2 of the wheel, waiting to see if we get assigned some shares. If we do, Monday will be step 3, sell the covered call:
2) We will also be closing out our SPY Bull Put Spread we opened on April 9th. The wheel of fun strategy above is one of the only instances where I hold options to expiry. For the vast majority of option trades it’s more beneficial to close them out early and there’s a couple reasons for that.
– Gamma risk. Gamma is the Greek that measures how much the option value will change with respect to changes in Delta (price). Gamma increases as the option is held closer and closer to expiry which means the risk of larger price swings increases the longer you hold options. In the first few days or weeks they aren’t very sensitive to price movements, but if you let them approach expiry they become too sensitive to price and subject to whipsaws and sudden declines in value. We don’t dance on the Gamma knife edge so we almost always close options early.
– Risk vs reward. Every day that we have an option open, that’s capital that’s being tied up and not available to use on other trades. So there’s a point where an option has captured enough profit that it’s not worth holding on to it any longer to capture whatever remains. Here’s what our trade looks like today:
Our trade has only been open for 10 days, yet we’ve already captured 856.96$ of a potential 1230.00$ which is about 70%. This contract doesn’t expire until May 18 which is 29 days from now. It’s not worth holding this trade for another 29 days to only capture the remaining 30% left.
Closing options early not only locks in profit but it also avoids that Gamma build up and it frees up capital for any other opportunities that may arise.
* We may also be closing our Iron Condor out for profit tomorrow or Monday for the same reasons 🙂
Current VTS Total Portfolio Solution Allocations
10% VTS Conservative Vol Strategy – Optional replacement for lower risk tolerance investors
10% VTS Aggressive Vol Strategy – Optional replacement for higher risk tolerance investors
Temporarily paused: VTS Tactical Volatility Strategy
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