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The stock had a pretty good run, but now, it's starting to soften a little bit. In fact, it dropped 50 cents today, back to $72.
Well, we're slightly short Delta, at 87. If we wanted to be a little bit closer to Delta-neutral, we could sell 100 shares of stock, which we purchased at $71.51. It doesn't give us a very good profit, so the last 200 shares that we purchased, was at $72.51. We could sell those shares, and make a $100 profit. The current price is $72.01. If we sold it at $72.51, that gives us a 50 cent profit, for a $100 profit on 2 shares.
We decide to wait, to see if we can sell more stock, as the stock continues to drop. It's not necessary. We could take the $100 profit if we want, but we're going to wait and see what happens. The stock drops to $71.80. We're now short 122 Deltas. Once we're short or long 100 Deltas, that's when I like to pick up or sell more stock.
At -122 Deltas, I will sell 100 shares of the stock that I purchased at $72.51, for a profit of almost $100. I'm only going to sell 100 of those shares. That brings us back to a relatively Delta-neutral position. You can see that just fluctuating the price up and down, by less than $1 or $1.50 in either direction, or $2 at the most, we've been able to generate almost $1000 in profit on this position, in a relatively short period of time. At least, I hope it's a relatively short period of time.
That's why you really need the stock to move. Let's take a look at a 15-minute chart of the Russell 2000 Index, the one that I've just been demonstrating to you. As you can see, prices hit a low back here - this was last Friday, approximately one week ago, of $68.08 - as the stock continued to move up, you would be selling stock, because your Deltas would be getting longer and longer.
At $69.43, you're $1.50 from where you were. You would have sold stock. It would have then declined back to $68.50, where you would have sold that stock, in order to become Delta-neutral. Once again, the stock rallied, and you purchased more stock when it got up to $69.46.
At that point, you were selling stock because you were long Deltas. For a while, the stock just traded sideways, and then started moving up rapidly. Since you were only a little bit long Delta, you only sold maybe 100 to 200 shares, at this point. Once it got up to this point, you would be quite long Delta. You would have to sell at least another 200-300 shares.
Now you are short approximately 400 shares. At this point, it traded sideways for quite a while, until it had a very large run up here. At this point, you probably would have been extremely long Delta, probably about 600 Delta long, and you would have had to sell 600 shares.
Now, you are short 1000 shares of stock, at $72. If you are short 1000 shares of stock at $72, what happens to your straddle position? Your straddle position is probably also at a negative position, or a relatively long Delta.
At this point, stocks drop off dramatically, down to $71.
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