VLO : Trade Adjustment for March 2012

This is a follow up article to the original Trade Entry:


The first setup was VLO :

Trade entry on Feb 27th 2012 :

Long VLO 600 * 24.53 (Feb 27th 2012 close price) = $14,718

Long 6 VLO Sept 2012 Puts strike $26 costing $3.70 = $2,220

Total trade cost = $16,938

Trade rolled at 1.50pm on March 8th :

Long VLO 600 * 27.96 (trade price) = $16,776 (stock loss = $2058)

Sell Long 6 VLO Sept 2012 Puts strike $26 costing $2.44 for $1464 (put loss is $1464 – $2220 = – $756)

Total position gain $1302 (strategy is up 7.7%, although for comparision underlying stock (“buy and hold”) is up 14.0% )

Analysis versus buy and hold

Interestingly these examples show the theory behind why this hedging strategy can work. Lose less on the losers (as the put gamma causes put delta to increase as underlying declines) and make more on the winners (since put delta decreases as underlying increases, so the overall position delta increases at a faster rate as the underlying increases). Basically the put slows losses faster if the underlying keeps going down, but conversely has less effect on profits if the underlying keeps going up.

Buy and hold performance is :

(VLO profit/loss) = $2058

ITM married put strategy :

(VLO stock + put profit/loss) = $1302

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