As a spread trader I sometimes find myself in a tricky situation when the market gaps up. I like IV going lower because most of the time I am net short vega each month. But on any up gap in the market the major thing that effects spread traders is the delta change. At the end of yesterday I had a small net short delta, and after today with this gap up I am very short delta. Now the main point of this conversation is what I plan on doing. To give you an idea my beta weighted delta is -130, based off the weighting of SPX. One reason I have a relatively small short delta is I am long SDS which is an ultra short. It certainly helps to balance my over all delta, but what I am more concerned about are the individual spreads.
This brings me into how I manage my deltas on short strangles. Below is the current position. I put this position on June 27th (click here to see). Now if you notice my position delta is round -40, vega is round -20 and my theta is small at +6. Now if I wanted to reduce my position delta to mitigate any risk to the up-side I could do a whole list of things. Now I typical want to improve my over-all greeks, the best scenario would be: reduce delta in half, increase theta, and keep vega where it is. Now the only hard thing todo is reduce delta without effecting vega.
Below is the adjustment I like and feel comfortable with reducing my deltas, but I don’t want reduce them to much. I also like to bring into my thought process the technical view of the underlining. All I did was roll my short put up. Pretty simple right? I increased my theta, reduced my delta and slightly increased my vega. This is my adjustment on this trade and I am feeling very comfortable with going into the weekend and into a holiday week.