How are these positions losing money?

Hello,

Question:

Why are some of my positions losing money if I adjust?

I am using the TOS profit loss analysis tool and, for instance, I have a short strangle that I put on a few days ago starting out with a max. profit potential of about $1,770 on my planned exit date of 12/18/07.

Now it is positive about 100 deltas, It's actually slightly profitable right now (about $255)

The thing is, when I use the p/l tool and sell 100 shares of the stock to bring my delta back to neutral, the max profit potential on the 12/18/07 exit date cuts down to about $1,524.

Where did this profit go? How did I lose it's potential? And most importantly, how can I prevent further erosion of my profit potential for this trade and in the future?

Any help is greatly appreciated.

 

The fact that about 255 plus about 1524 equals about 1770 suggests to me that your software may have counted the $255 as realized when you adjusted the position and chosen a new starting point at the time of the adjustment.

 

okay thanks. So am I correct to say that an adjustment made when a position is showing a profit will capture that profit and if I adjust when the position is at a loss then it will be a realized loss? Does this hold true for both long and short positions?

(I am currently in short strangle positions)

Thanks again.

 

I think it's a quirk of your software.

Unless an adjustment is such that it completely closes a leg of your position, I wouldn't be booking profit or loss until your whole position is closed. You can follow the net value of the position as it progresses to track your progress, but don't count your chickens while they're still being strangled. Or something.

 

Odds are, your software is thinks that your short strangle and long shares is an initial position. If so, it will do that regardless of whether the initial position (the short strangle) had a paper gain or loss when the shares were added. You can verify this several ways.

1) Set up a few positions Monday and adjust one that went up and one that went down.
2) Read the release notes/tutorial
3) Contact the programmer

If the software is doing the above, you can use a stubby pencil to keep track of what you know to be paper gains (or losses) but disappears when you adjust or you just have to write a spreadsheet that covers it all.

 

The position was only a short strangle with options initially. I never had any long shares to begin with or now. I did short the 100 shares though.

It does add the adjustments to the existing position though. You would think I wouldn't have to check my positions by hand...I mean, it just seems that a smart person who can create a program like TOS would have though of this. I guess I'll just ask the technician as that would be the quickest easiest route.

Thanks for the replies everyone.

 

If you have negative gamma in your position every adjustment is like an “stop loss”. If you have a positive gamma, every adjustment means that you’re saving your profits.

Every time that you make an adjustment you are changing your position and the potential profit changes too.

Sugar