Why I’ve Switched to Delta Neutral Strategies


Here’s a great video from Mike Butler of TastyTrade about Delta, so that I don’t have to try to explain Delta in this post.

The Evolution of my Trading

Buy and Hold Long Stock

Like everybody, I started my investing career by buying and holding long stock.  I’ve always been able to pick good stocks and managed to stay close to the growth of the S&P 500.  But I was looking for something better.

Weekly Covered Calls

Somewhere I saw one of those Traders (that is selling their program that will change your life and improve your retirement), who was selling the idea of buying weekly covered calls.  I liked the idea because it seemed like it was leveraged to the upside, so bring on Weekly Covered Calls.

It was actually a pretty cool way to invest.  Most months, I was able to beat the S&P (barely).

What I hated about this strategy was that at earnings, when volatility was high and the option premiums were high, it was a crap shoot. Sometimes the stock stayed at the same price or went up after earnings; but at other times the stock dropped like a Chinese Space Station and no amount of option premium covered the loss in the stock.

Using Long Options as a Proxy for Long Stock

I got this idea from the great Jim Cramer.  In one of his books he talks about how you can use options to replace stocks and thereby leverage your portfolio to the upside.

This strategy used to be awesome for me.

For between 10 to 15% of the price of the stock you can control 100 shares of stock.  During the raging Bull Market, this strategy was like printing money.

The problem with this very high-delta strategy was the downside.  Being highly levered to the upside meant that you were leveraged to the downside.  It was too expensive to completely hedge all those deltas or the wild beta.  During the market collapse of February, 2018, you couldn’t sell options quick enough to stop losing thousands of dollars because of the high deltas of the portfolio.  Yikes.

Weekly Covered Calls on LEAPS

In Excel, this seemed like a really great trading strategy.  Buy a LEAP option that was about 9 months in the future and sell weekly calls against it.  Some LEAP’s can be purchased for about $10.00 and have a very low Theta because of how far they are in the future.  I tried to hold the LEAP until expiration.

Some of the weekly options brought in about 10% premium on the LEAP.  It seemed like a really great strategy.

First I got the Trader’s version of the gambler’s fallacy.  I figured if I could get 10% return on weekly basis, then on an annual basis – 520%!  I started shopping for my island in the Caribbean.

Sadly, in downturns in the market, this is a really painful strategy as you watch the LEAP lose value.  Trust me on this.

Directional Put Spreads

I’m always bullish on the market over time.  So what could be better than buying an out of the money put spread?

In my mind, it was almost like printing money.  I put this strategy in play and started shopping for my island in the Caribbean again.

The problem with directional trades is that you have to be able to predict which way the underlying was going to move.  Sadly, the market humbled me and showed that I can’t predict direction.

A couple weeks ago, Facebook had dropped to about $168.  I was sure that there was no possible way that Facebook could possibly drop further, I sold a 150/160 put spread, knowing that it was impossible that Facebook to drop further.

Uh, ouch.  Facebook is trading around $155 today.  So much for my ability to predict direction.

Delta Neutral

Enter Delta Neutral.  With Delta Neutral Strategies, I don’t have to worry about normal moves in the underlying.

So now I’m trading volatility and time decay.

Stay tuned for how this strategy works for me.




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