Condor Options

With the VIX on the rise again but meeting resistance around 45, we’re planning to publish at least one double-diagonal trade (see Part I, Calendar-Condor Fusion) for February expiration. That way we’ll have a chance to get some positive vega into our portfolio, but we won’t be taking on as much volatility risk as we did in the January cycle.

But before we dive right in, it’s important to be aware of some trade-offs and caveats related to double-diagonals:

• The base-position cost is higher than that of a double-calendar because of the margin required for the vertical spreads. For flexibility if and when we need to adjust the position, it’s important to open the trade with an even number of contracts per leg, like we do with a double-calendar—so our base position is the same size (2 contracts/leg). But the net cost per contract, including margin, can be more than twice that of a typical one-month double-calendar spread. (Note, too, that, as with our iron condors, we would have double the margin requirement if our broker doesn’t calculate margin based on overall portfolio risk rather than the risk of each individual vertical spread.)
• Adjustment may require a significant amount of cash. One adjustment technique we sometimes use with double-calendars involves buying an additional diagonal spread for a debit, which can easily increase our total cost by 50 percent or more.
• Lower vega means that we don’t benefit as much from an increase in implied volatility as we would with a double-calendar.

Strictly speaking, a double-diagonal isn’t a calendar spread as we define the term; therefore, we’d normally make it a bonus trade. On the other hand, it is a calendar spread in a more general sense, and when we launched Calendar Options we promised to teach subscribers every technique we could think of for earning income from calendar spreads in this challenging market environment. So we’re considering including some double-diagonals in our official newsletter trades, at least as long as the VIX is above 40 and prone to moving 10 points or more in a week.

As noted above, double-diagonals require more margin per base-position unit than the double-calendars we’ve traded so far, and we don’t want autotrading subscribers to be caught off guard by a bigger-than-expected allocation. Nevertheless, the margin requirement for a double-diagonal with a one-month horizontal spread is no more than the cost of some double-calendars with a two- or three-month time spread, which are part of our core strategy (even though their vega is too high to trade them right now). We’d be interested in your feedback—especially if you’re autotrading Calendar Options—regarding the idea of including this cousin of the calendar spread in the Calendar Options portfolio.