If you're looking for some extra trading motivation and access to innovative ideas, there's no better place than Dr. Jim Schultz's From Theory to Practice.

"Doc" Schultz brings a level of enthusiasm that simply can't be matched, and a recent episode offers some new ways of thinking about risk and portfolio management.

In an episode titled "Underhedging," the good doctor walks viewers through a fresh approach to delta exposure.

As often discussed on tastytrade, delta neutral trading removes a portion of directional exposure in volatility-biased trades.

For example, if you sell a call, your primary risk is that the stock blows through your upside breakeven. However, if you hedge the short call using a delta neutral approach (by purchasing stock), you can reduce your directional risk.

It should be noted that even if you decide to initiate a position without a delta neutral hedge, movement in the stock will increase directional risk in the position.

For example, let's say you purchase an at-the-money (ATM) call and the stock price subsequently increases. At this juncture, you could close the position by selling the call at a higher price.

However, you could also take some of the profit off, and simultaneously reduce directional exposure, by selling some stock against your naked call. In this case, if the stock retreats, you will have locked in some profit. On the other hand, If the stock continues to go up, you may continue to profit from the position (depending on your break-evens from the combined position).

Now imagine that you possess a short premium volatility portfolio that benefits from a steady rise in stock prices. Unfortunately, you also notice that when the market goes down, your portfolio doesn't perform nearly as well. One method of adjusting your net exposure might be to underhedge one or more options in the portfolio.

For example, if you sell a call, you could purchase fewer shares than you might under a strict delta-neutral strategy. By doing so, your portfolio now adds additional short delta exposure.

These are the concepts that Dr. Schultz explores in greater detail on his show.

It's entirely possible that the concept of underhedging doesn't fit your current strategic approach and risk profile. However, there may come a time when market conditions cause you to rethink the way you manage risk.

Even if you aren’t ready to deploy underhedged positions at this juncture, you can always put on a mock (theoretical position) and track the performance as a means of testing the impact on portfolio returns.

For the best possible understanding of the above information, we recommend you watch the entire episode of From Theory to Practice focused on "underhedging" when your schedule allows.

Don't hesitate to reach out at support@tastytrade.com if you have any questions or comments.

Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.