Portfolio Deltas

In my article about choosing vertical spreads I discussed that I look at my overall portfolio to help me decide what to look for. In other words, I try to keep my overall portfolio fairly market neutral unless I have a strong belief that the market will move soon. There are benefits and drawbacks to this approach, but I think the benefits outweigh the price one pays. For example, if the portfolio is fairly neutral I don’t make a lot when the market has a big move. Other people are raking in the cash and I just make a few nickels. The benefit is that I don’t lose a lot either. I like this type of low stress trading and find that I make small amounts of income fairly consistently.

In order to keep the portfolio neutral I keep both bullish and bearish trades on at the same time. Most of these positions make money from time decay, so as long as I keep things neutral I make my money through option premium erosion. With that in mind, let me show you how I track my overall portfolio position. The first thing I do is to keep an eye on my total account when it is “Beta Weighted” to a particular index. You can Beta weight the portfolio with any symbol, but I usually use the SPX, which is a reasonable view of the overall market. ThinkOrSwim has a very quick and easy way to do this on their “Analyze” page. This picture below is one of my accounts Beta weighted to the SPX. In other words, this is a picture of all stock, ETF, and index positions converted to SPX using Beta.

The green line is expiration, so it shows profit at expiration. The white line is today. One of the important numbers I look at is the overall Delta of the account. What you can't see in this picture is that the current Delta is about 40. In other words, if the SPX goes up one dollar, I would make 40 dollars. If the SPX goes down one dollar, I lose 40 dollars. These Deltas fluctuate constantly during the trading day as prices fluctuate, so it is virtually impossible to keep them exactly at zero, but anything between 100 and -100 is flat enough for me. If I start to approach those levels, however, I will start looking for a good trade in the opposite direction.

Right now Deltas are positive, so to flatten them out I would need a trade that would be bearish. I could short some stock, buy a put option, or add a spread of some type. Generally I would prefer a trade that also adds Theta, or time decay profits, to my overall portfolio. In this case they aren't positive enough, so I won't do anything

Watching portfolio Deltas is something I do a few times a week. It just takes a minute, but it always gives me an idea of where my price risk is. I know that if I keep them close to neutral I won’t get hurt by a big move in either direction.

Good Trading…