Condor Options

Buyers left the building with Elvis today, with breadth (advancing issues vs. declining issues) more than 5:1 negative and down volume exceeding up volume by a factor of more than 17:1; every sector was deep in the red. The A/D volume ratio was a tad worse on September 1, but we have to go all the way back to April to find another day when traders were dumping shares with such abandon. The bulls briefly put up a fight in the SPX 1035–1040 support zone, but were soundly routed in the final hour of trading.

The probability of a sharp pullback like we’ve seen over the past week is precisely the scenario we were guarding against when we decided not to roll up our contracts at the 103 strike, and instead hedged our portfolio with Oct/Nov CS#3 (108 strike). Now we’re in the reverse situation, having crossed below the lower adjustment threshold of CS#3—but with less than 15 days until expiration and three open trades already, adding another position is a less attractive option (not to mention the fact that adding more vega would make it hurt more if and when the market rebounds).

Nevertheless, we’re in an excellent position to manage our risk with an adjustment at the portfolio level. Today SPY plunged through the position adjustment threshold for CS#3, yet closed (barely) above our portfolio adjustment trigger at $103. With SPY below the halfway mark between the two, and support at SPX 1035 broken on heavy volume today, I’m inclined to be defensive and go ahead with an adjustment tomorrow intraday if the sell-off continues, or if a reaction rally fails to convincingly reclaim the 1035 level. In the meantime, here’s where we stand with our October trades:

SPY October/November Calendar Spread #1 (103 puts)

We closed today about at the money for this position, with an unrealized profit close to 15% in the last few minutes of trading.

SPY October/November Calendar Spread #2 (105 puts)

With the help of higher implied volatility, this position is still showing a paper profit of nearly 12% despite today’s sharp drop-off below the strike price; but the position delta of about 26, combined with the even greater positive delta of our third October position, contributes to our defensive posture heading into the morning.

SPY October/November Calendar Spread #3 (108 puts)

Our  upside hedge position is showing an unrealized loss of about 11.9%, and its delta near the close today was about 53, which constitutes the majority of our downside portfolio risk. If we see a bearish follow-through, we’ll roll half of our contracts to a lower strike; otherwise, it’s steady as she goes.

The current unrealized gain for our October portfolio, on a share-weighted basis, is about 5%, and our portfolio delta is about 79…definitely in the risk-management alert range. But, again, it all depends on whether the selling continues tomorrow or the bulls stage a comeback. Here’s the current picture: