Selling add'l naked puts increases the exposure on one side and magnifies downside risk. Selling OTM naked calls or bearish call spreads adds it to the other side. He's not going to lose on both sides. Second, "scared" is a poor word choice. IOW, it's OK to sell naked puts and watch the UL go down but God forbid you sell a naked call and the stock rises? That's a bit of a disconnect. Naked is naked.
We just run sheets of stocks showing simple delta's at plus and minus 10 and 20% of Underlying price, and forward until expiration. Adjust deltas by simply picking the best put or all to adjust with. If my deltas are within 3,000 or so, starting at near zero with today's closing price, withing 10% or so in price, I'm fine with that. Especially if we have multiple stocks to level out risk curve. Rather than buying something in (only if really cheap), we generally find something that appears overvalued based on implied vs. historical, front vs. far outs etc. Do
We just run sheets of stocks showing simple delta's at plus and minus 10 and 20% of Underlying price, and forward until expiration. Adjust deltas by simply picking the best put or all to adjust with. If my deltas are within 3,000 or so, starting at near zero with today's closing price, withing 10% or so in price, I'm fine with that. Especially if we have multiple stocks to level out risk curve. Rather than buying something in (only if really cheap), we generally find something that appears overvalued based on implied vs. historical, front vs. far outs etc. Don
How do you adjust if gap risk materializes (for example, if some major unexpected event happens that causes all the market to open with a large down gap)? As stocks tend to be very correlated in such events, even if you diversified your positions it might not proved to be a good hedge when most needed. And if you will want to adjust the delta after the event occurs you will need to incur material losses, isn't it?
We simply adjust to reality. Heck, way back in the crash of 1987, Black Monday, my best trading day ever, nice 6 figures.... that one just happened to go my way because I bought a few hundred cheap puts to cover my net long position on the Friday before. You simply have to go with the percentages, just like blackjack. You know when the card count is high, you have a higher likelihood of getting blackjack, so you bet more. Sometimes the dealer gets blackjack, and you don't win. But, when you do win, you get paid an additional 50% of your bet. So, lose $100, win $150 for example. In options, you have to judge your own risk levels. Sure, you "can" have a black swan day, but if you just plan for rare events, then you can't possibly make any money. Some try to be "back spread" and only make money when the stock moves up or down, but if the stock stays around the same price, they hemorrhage money every day. So, we keep the deltas pretty neutral, and keep the gamma in fair shape, and all is good. Remember, "no free lunch" only Risk/Reward. Don
Don, thanks for your elaborate responses. I understand what you are saying, but I am afraid that if there will be such a black swan day, it is not just a matter of bad trading day but it can really wipe me out and put me out of business (obviously, if you multiply any amount of large profits by zero, the result will always be zero...). I assume you are a pro that have years of experience, but for a small retail trader like me, I just can't imagine of putting in risk not only the money that I have but also the money that I don't have and hope the market will not get totally crazy when my trades are on or at least will let me to adjust it. My thinking may be somewhat conservative, but there are risks that I just cannot accept.
I can understand, but why then would you even consider trading at all? Sounds a bit like a guy with a fear of heights insisting on climbing a sheer cliff face, why bother? I've always maintained that trading is not for everyone. It can't be "fun" if you're overly concerned about losing some money. Heck, take up a hobby, and enjoy your life. All the best, Don
There are ALOT of profitable traders out there who completely disagree with this. adjusting a spread isn't unusual, will depend on the conditions involved, and the adjustment can but never always means its a new position. iron condors,for example, depending on market movement, will have to have their deltas hedged but that certainly doesn't change it from being a iron condor the "only" time it really turns into a brand new position is for example if you had a time spread(calendar, for example-non directional trade), adjusted it, and the adjustment made it overwhelming directional. then it would be a new position. you would have to seek how the greeks changed.
It's semantics as to what is a NEW position vs an OLD one. My point is that you can't say, "my trade is losing money and I can fix it." You can make it stop losing money, or you can make it lose more money. But rolling down a strike isn't automatically fixing your trade. Nor does delta hedging it. That's also not to say that you can't improve your situation by doing that. When you are short 50 strike GMCR puts and watch the stock go below 50, and you roll your position down, you didn't adjust your trade. You were saying before the stock wouldn't end below 50 and now you are saying the stock won't end below 45. Different view. If you delta hedged the original trade you are saying, there is a chance that this stock sells off further but it may rally and being short the vol is a good trade. Again, a different view. If you do nothing then you are saying "my view hasn't changed." If you add to your position, then you are saying, "I'm more convinced of my view."
There can be a fairly big difference between what you call "semantics" and a material change in the option greeks. all "views" aside