Adjustments of Option Positions

Some insights on how I personally adjust my option positions

Hey everyone,

In my previous post, "Greeks (Friends and Foes" I talked about my love affair with Theta – the decay that consistently fills my pockets. (Think of it as premium harvesting!). But as any seasoned options trader knows, the market can be a fickle beast, and sudden, sharp moves can quickly turn those sweet premiums into stinging losses.

Over time, I've developed a, three-pronged strategy to mitigate these risks and keep my Theta machine running smoothly. Let's dive in! Firstly, do subscribe to my substack below for updates on new posts.

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The Foundation: Strategic Position Creation

Before we get to the adjustments, let's lay the groundwork:

1. Out-of-the-Money (OTM) Focus: I primarily sell OTM options, typically 200+ points away from the at-the-money (ATM) strike. The exact distance is adjusted based on time to expiry, but my sweet spot is around ₹50 premium – where Theta decay is most potent as shown in Max Theta Decay in a day analysis.

2. Early Exit: I close most positions one day before expiry to avoid the dreaded Gamma risk.

3. Weekly Expiries: I focus on weekly Nifty expiries, entering positions by Friday and reserving Monday, Tuesday, and Wednesday for adjustments.

4. Margin Buffer: Crucially, I maintain 3x the deployed margin as free capital. This allows for flexible adjustments without margin calls. (e.g., ₹1 crore deployed, ₹3 crore available).

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The Defense: Adjustments on Monday, Tuesday, and Wednesday

When the market throws a curveball (say, a significant upward move in Nifty), here's how I react:

1. Algo 1 - Saviour Code (Delta Hedge) (Detailed Explanation in the link) - When NIFTY moves higher by x points a PE position is sold which is y points away from the current NIFTY price. Here both x and y are configurable and depends on current delta and days to expiry.

   1. Eg

      1. Monday: For every 20-point Nifty rise, sell a PE 200 points away.

      2. Tuesday: For every 15-point Nifty rise, sell a PE 120 points away.

      3. Wednesday: For every 10-point Nifty rise, sell a PE 70 points away.

   2. So on Wed whenever this algo is running and some of my CE sell positions are in ITM, for every 10 points move in NIFTY the algo sells a PE position which is 70 points away from current price.

   3. This algorithm sells Put options (PE) to counteract the increasing Delta from my losing Call options (CE).

   4. To free up Margin I close far OTM profitable PE positions.

2. Algo 2: The "Wave Extractor Code" -

   1. This algo capitalizes on intraday market swings.

   2. It sells CE on Nifty upticks and buys them back on pullbacks, and vice-versa for PEs.

   3. A crucial delta check ensures that trades only reduce the overall position delta, preventing excessive risk.

3. Manual adjustments of ITM positions - This is done manually on ITM positions.

   1. Converting Delta to Theta #1 - ITM CE positions are converted into ATM straddles (ATM CE + ATM PE). This transforms Delta risk into Theta profit as expiry approaches. (Implemented progressively: 1/3 on Monday, 1/2 of the remaining on Tuesday).

   2. Converting Delta in to Theta #2 - ITM positions are converted into multiple OTM positions of the same type (e.g., 1 ITM CE becomes 2-3 OTM CEs). This reduces Delta and increases Theta.

Margin Handling

• The 3x margin buffer is essential for these adjustments.

  • Say I have a margin used of 10 Lakh on Friday for next Thu expiry, I will have 30L as a buffer margin for adjustments on Mon, Tue & Wed.

  • On Monday if market moves in opposite direction to me position.- I can use another 10L to adjust. Now the open position will be of 20L and 20L will be buffer margin.

  • On Tuesday if the market still moves in the opposite direction- I will use remaining 20L as margin to adjust positions. This will make total open position margin of 40L and 0 as remaining margin.

  • If required on Wednesday, I buy far OTM options (400+ points away) to free up additional margin. Also I would close profitable positions and use that margin to adjust the positions. And I will close my positions on Wed to save myself from gamma impact.

• This have been proved to be a good strategy over last 12 months and I have been able to successfully adjust my positions without taking huge losses.

My Trading Style

I have found that my trading style is a bit different than that of other traders due to one very important difference. I think trading through a unified position book instead of multiple rigid strategies. You can read the complete details here -

I'm always eager to learn and improve. Share your thoughts and strategies with me via DM on my X profile.

Note - The algos which I have mentioned here are basic idea on how they run, after running them and learning from them, there have been many boundary cases implemented on top of the base idea which make these algos way more robust.

I plan to make the algos open source but as the quality of the code is bad, I am hesitant on making it open. The code written is in Python and if someone help me to make it more modular and readable, please DM to me on my X profile.

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