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2019issue C0348-49

Grade the first seasonal long-put gain as a maintenance exam

A long-put on a crude-linked fund expressed October and November weakness in crude. Once the fund had declined, the case compared a scale-out-position, a same-expiry roll-down, and a financed two-sided-overlay by remaining-delta and residual lock.

  • After a seasonal long-put has already paid October and November weakness, leaving the contracts unchanged still exposes both the original debit and the open gain to a rally.
  • A scale-out-position that sells seven of ten puts can lock a residual credit and cut remaining-delta further than a same-expiry roll-down that keeps ten lower-strike puts.
  • A half-after-a-double exit does not grade this book, because that rule applies only after a doubling that is uncommon in practice.
  • Open put value can fund a two-sided-overlay of later-dated calls and puts so a large move either way can still be expressed while the seasonal decline is still in force.
Entries in this reading3 entries
Current trackScale-out position reduction22 readingsLong put28 readingsSeasonal trading130 readings

Seasonal-trading opens a limited-risk long-put

A limited-risk long-put on a crude-linked exchange-traded fund was used to express seasonal-trading, here a negative October and November bias in crude oil. The case opened ten January 2019 17-strike puts. The debit paid was the maximum loss, and January expiration breakeven was 15.18 per share.

By 23 October 2018 the fund had declined 8 percent. Leaving the long-put unchanged then left both the original debit and the open gain exposed if the fund rallied.

A doubling exit does not grade an ordinary gain

A common half-after-a-double exit was treated as incomplete because it only applies after a doubling that is uncommon in practice. The book still needed a position-adjustment: buying or selling options to change an existing position, typically giving up one feature of the payoff to obtain another.

Scale-out cuts leftover delta more than a roll-down

Selling seven of the ten puts was the scale-out-position. It locked a residual credit if the underlying reversed. Remaining-delta, the leftover share-equivalent sensitivity after the adjustment, fell from about 900 to about 270 in absolute value, so further declines would add less incremental gain.

A roll-down sold the ten 17-strike puts and bought ten January 2019 14-strike puts of the same expiry. That kept some downside participation at the lower strike, but remaining-delta stayed about 448 in absolute value, more than after the seven-contract scale-out.

January expiration P/L for three ways to handle the USO put

After USO’s October drop, selling seven of the ten January 17-puts locks a $273 credit but flattens the expiration slope to three remaining puts. Rolling the lot into ten January 14-puts locks $450 and keeps a steeper downside line. The original ten 17-puts still go worthless above $15.18. Floors, sizes, and strikes are the printed OptionsAnalysis table values; the lines are those puts’ expiration payoffs.
After USO’s October drop, selling seven of the ten January 17-puts locks a $273 credit but flattens the expiration slope to three remaining puts. Rolling the lot into ten January 14-puts locks $450 and keeps a steeper downside line. The original ten 17-puts still go worthless above $15.18. Floors, sizes, and strikes are the printed OptionsAnalysis table values; the lines are those puts’ expiration payoffs.USO · January 2019 expiration · 2018-10-23T00:00:00.000Z to 2019-01-18T00:00:00.000Z

Expiration value only. Pre-expiration model curves on the vendor graphs were not traced. The financed two-sided overlay (Figure 4) is not in this unit.

Open put value can finance a later two-sided overlay

Open put value was used to sell January 2019 16-strike puts and buy four April 2019 14-strike calls and four April 2019 14-strike puts. That two-sided-overlay added later-dated long calls and puts while the seasonal decline was still in force, so a large move either way could still be expressed.

Educational research material, not investment advice. Historical source context does not establish present-day performance.
17 of 18 in the Scale-out position reduction track
201916-19 pp.Next on Scale-out position reductionFailed candlestick fades with breakout permission and scale-outA failed-candlestick locates trapped-order-liquidity beyond the bar as the fade objective, not as a forecast of a new trend.
All readings on this track · 18 readings
  1. 1989One add option sizing with a scale-out and a trail
  2. 1991Precommit scale-outs and puts to replace impulse
  3. 1991A written game plan for checklist, scale-out and staggered stops
  4. 2004Name the stop, require a 1:3 reward, then scale out half
  5. 2005Why pre-target scale-outs lower expected value
  6. 2008Preplanned butterfly exits with stops and scale-outs
  7. 2010Qualified trend, volume breaks, and a staged scale-out
  8. 2011Gated entry and scale-out after a climactic selloff
  9. 2011First-target review: scale out or flatten
  10. 2012Tiny scale-out as a systems decision test
  11. 2014Written size and exit scripts for scaling and risk
  12. 2017Constructing livable scale-out exit rules
  13. 2017Why the simpler looking system is harder to run
  14. 2018Prewritten scale-out and exponential moving-average exit procedure
  15. 2019A dual-career swing procedure that must output entry, scale-out, or abstention
  16. 2019A same-session opening-range breakout with a whole-number stop and scale-out
  17. 2019Grade the first seasonal long-put gain as a maintenance exam
  18. 2019Failed candlestick fades with breakout permission and scale-out
By fieldOptions and volatility435 readingsBy year2019140 readings
All 22 readings tagged Scale-out position reduction
Also on Scale-out position reduction5 readings
1989One add option sizing with a scale-out and a trail1989Shorter series need fewer recovery hits and raise scale-in cash1991A written game plan for checklist, scale-out and staggered stops1991Precommit scale-outs and puts to replace impulse1998Cash recovery grids for residual share construction