Options Portfolio Management

Options Education: Portfolio Management

I constantly evaluate my options portfolio based on two main factors: time and delta. What do I mean by this?

Time

Time is the most important and easiest to understand. As an option is approaching its expiration, time is running out on the options life. For example, our September options expire next week, so next Friday afternoon, September options will cease to exist. Because of this, September options are on the top of my radar, followed by October, November, and so on.

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Here’s how I rate our positions in order of importance based on time:

Anheuser Busch (BUD) September Position
Cypress Semiconductor (CY) September Position
Micron (MU) October Position
Bank of America (BAC) October Position
Pulte Homes (PHM) October Position
S&P 500 (SPY) January Position
Sprouts Farmers Market (SFM) January Position
Kraft Heinz (KHC) January Position
Johnson Controls (JCI) April Position

Delta

Delta is harder to understand. The delta refers to the expected price change of an option, based on the stock’s movement. The two most important components of determining an option’s delta are the time left until the option expires and odds of the option finishing in-the-money.

Let’s use our Anheuser Busch (BUD) September 115 Calls to illustrate.

Regarding the time component, our Anheuser Busch (BUD) calls expire next Friday. Time is running out on the option.

As for the odds of the call finishing in-the-money component, as of this afternoon, the BUD September 115 Calls are $6 in-the-money.

Because time is running out, and because the option is so far in the money, this option has a delta of 100. Why?

It is assumed that the call will finish in-the-money in the next week, and thus it is assumed we will exercise our option to buy the stock at 115. And because of these assumptions, our calls have a delta of 100, and will move $1, for every $1 the stock moves. If the stock goes up $0.50, our September 115 Calls will move higher by $0.50. If the stock drops $2, our option will lose $2.

Decay

Conversely, our Cypress Semiconductor (CY) position is not in as good shape. Our call expires next Friday. And with the stock $1.30 away from the 15 strike, the call has a zero delta. Why?

It would take a big move for CY to rally from 13.7 to above 15 in the next week. The rally would have to happen REALLY soon. And because time is not on our side, and the likelihood of the stock rising above 15 is small, our call likely won’t start moving higher until the stock gets closer to 14.75. At that point, the call would have a better chance of finishing in-the-money.

So if I combine the time and delta factors, this is how I would rate my attention on my positions:

Anheuser Busch (BUD) September Position (highest delta and time component)
Micron (MU) October Position (stock at highs which is increasing delta component)
S&P 500 (SPY) January Position (on my radar, but has time)
Sprouts Farmers Market (SFM) January Position (on my radar, but has time)
Kraft Heinz (KHC) January Position (on my radar, but has time)
Johnson Controls (JCI) April Position (won’t be a real concern for months)
Bank of America (BAC) October Position (buy-writes have low deltas as they are somewhat hedged)
Pulte Homes (PHM) October Position (buy-writes have low deltas as they are somewhat hedged)
Cypress Semiconductor (CY) September Position (time and delta say this position is nearly dead)

Because of the time and delta of BUD, I’m laser-focused on the stock (making new recent highs this afternoon). Our position will move dollar for dollar with the stock, so I have my finger on the exit button should the stock drop. If you do not want to take the risk over the next week, and there is always gap risk because BUD is an ADR, you can exit your position today for a profit of approximately 120%.

I hope I did a good job of explaining a difficult subject matter. However, please don’t hesitate to email me if you have any questions.

Your guide to successful options trading,

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