Market Direction and Delta-Neutral Trading

When you buy premium, be prepared to take action if the market makes a big move so you can lock-in profits. When you sell premium, don't expect volatility to collapse right away. You will probably need to be patient. You hope the underlying security won't move a lot while you're waiting. However, time decay helps you while you're waiting.

Don't expect huge profits on any neutral option spread. A properly implemented delta-neutral portfolio will result in some strikeouts, a lot of singles and an occasional double or triple. Just remember, you should hold positions only while volatility is out of line. You may need to adjust your position several times because it became delta long or short. However, you should close your positions when there's no edge remaining.

Finally, resist the desire to be a naked seller close to expiration. The rewards can be attractive because time decay rapidly accelerates the closer you get to expiration. However, there's no limit to the losses you could sustain if the market moves through the strike price of the short options and you don't quickly close or adjust your position.

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