Condor Options

Even after this morning’s adjustment, with the market down another percent and a half today, we still have too much delta for our current level of unrealized loss. We’re rolling the remainder of our position at the 115 strike down to 103, as follows:

Day limit order
Buy to close 1 SPY Feb 115 call
Sell to close 1 SPY Mar 115 call
Buy to open 1 SPY Mar 103 call
Sell to open 1 SPY Feb 103 call
for a net debit of $1.03 or better.

Note that 1 contract per leg represents all of our remaining position at 115 (1/4 of our original calendar-spread position).

Analysis: If yesterday’s market action had the feel of a selling climax, as I wrote last night, this afternoon’s is practically shouting it. The thing about capitulation, though, is that it’s pretty much indistinguishable from panic (which it is, to a lesser degree) until buyers decide that stocks have reached bargain levels, discover that all the sellers have been flushed out, and prices shoot higher with increasing volume. At this point all we know is that the S&P fell off a cliff about a half-hour ago. Our unrealized loss at the portfolio level has hit the 20% threshold for an intraday adjustment trigger, and SPY is more than a dollar below the price-level adjustment point we set after this morning’s trade. Now SPY is holding at pivot support long enough for us to compare adjustment possibilities and find out at what price the adjustment we select can be filled.

Calendar Options is a risk-management-based strategy, and that means risk-management trumps technical analysis. Nevertheless, we often use the latter to assess the risk inherent in the adjustment itself, and in this case technical conditions tell us to adjust incrementally. The spike in down volume, and in implied volatility, suggest that a reversal is about as likely as a further collapse. In any case, we can only roll down one position at a time, so we’re starting out by rolling what’s left of our position at the 115 strike to a strike far enough below the market to make a difference. With SPY under $105, we’re pretty close to the 104 strike—so 103 looks like a better choice.

Because we’ve shifted primarily to portfolio-level risk-management, the Trade Analysis table to the right shows the specifications for our aggregate position (base-position-weighted) after the adjustment. We’re keeping 85% of our delta bias for now (reducing it from 84 to 71), but that’s okay considering the odds that the market will rebound—and the fact that we’re prepared to make another adjustment if it doesn’t. We’re increasing our base-position gamma by about 3 points, but upping theta by more than 4 points. Vega is virtually unchanged.

We’re moving our lower portfolio breakeven down to about $103.65, and our new upper breakeven, just above $111, still allows room for a short-term rally (both are probably exaggerated by the jump in IV, but they’re what the pricing model is showing right now). The point a little less than halfway between the latter and the 110 strike looks like a reasonable price-level adjustment threshold, but our projected loss that close to the lower breakeven would be approaching 25%—so we’re going to set our lower adjustment point at about $104.50. That doesn’t give us much room to the downside…but if the market keeps dropping, we can’t afford to let our position deteriorate any further.