Condor Options

Friday was a perfect example of both why we have a whipsaw filter, and why we introduced a rule for bypassing it. At the time the second adjustment alert went out, we were at a level of unrealized loss that we’ve defined as the maximum we want to tolerate on the portfolio scale, and our portfolio base-position delta was more than 80. If the market had continued to plunge, we would’ve seen our paper losses mount quickly. On the other hand, an adjustment trade, with few exceptions, locks in a realized loss, and takes away delta bias that would be helpful in the event of a reversal.

So even though an intraday adjustment certainly was called for based on increased risk, as defined by our risk-management rules, it was important not to overreact. The small step we took was just the first of several I had planned in case the fear grew to panic, but it turned out to be the only one needed—the market reversed in earnest less than an hour later. Because the adjustment was incremental, though, we ended the day with our unrealized loss only a fraction of a percentage point greater than it would’ve been had we not gone through with the trade. Just before the close on Friday, our portfolio (base-position weighted) was showing a paper loss of about 13%, and our aggregate base-position delta was about 34.

Needless to say, this is not a typical month for Calendar Options. We usually have to make at least one adjustment trade, and it isn’t uncommon to need two or three—but six may well be a new record…and the month isn’t over yet. While it might not feel like it right now, there’s a plus side to all this trading: it’s a great opportunity for members to learn how we manage risk under extreme circumstances (assuming you’ve sized your positions appropriately for your risk-tolerance), keeping losses small enough to make up with a few winning months or less and staying in the game long enough to keep as much premium as we can in our pocket by the time gamma risk gets too high near expiration.

Now, as for the status of our open positions, we’ve reached the point where they’ve evolved quite far from their original form, and we’re now managing risk primarily at the portfolio level. Therefore, I’m going to forgo the usual accounting of each position’s price, unrealized loss and delta, and instead use this space to review each one’s current composition and total risk, and then list the current number of contracts at each strike in order of strike price:

SPY February/March Calendar Spread (115 Calls, Adjusted to 103/107/110 Triple-Calendar)

+2 SPY Mar 110 C
–2 SPY Feb 110 C
+1 SPY Mar 107 C
–1 SPY Feb 107 C
+1 SPY Mar 103 C
–1 SPY Feb 103 C

Total risk, per original base-position contract: $1.4575.

SPY February/March Double-Calendar Spread (112/117, Adjusted to 105/108/112 Triple-Calendar)

+2 SPY Mar 112 C
–2 SPY Feb 112 C
+1 SPY Mar 108 C
–1 SPY Feb 108 C
+1 SPY Mar 105 C
–1 SPY Feb 105 C

Total risk, per original base-position contract: $2.63.

SPY February/March Double-Diagonal (103/108/116/121, Adjusted to 103/108 Double-Calendar)

+2 SPY Mar 108 P
–2 SPY Feb 108 P
+2 SPY Mar 103 P
–2 SPY Feb 103 P

Total risk, per original base-position contract: $3.26.

February Portfolio

If we look at the above positions as one portfolio of calendar spreads distributed over a range of strikes, we have,

2 X Feb/Mar 112 Call Calendar
2 X Feb/Mar 110 Call Calendar
1 X Feb/Mar 108 Call Calendar
2 X Feb/Mar 108 Put Calendar
1 X Feb/Mar 107 Call Calendar
1 X Feb/Mar 105 Call Calendar
1 X Feb/Mar 103 Call Calendar
2 X Feb/Mar 103 Put Calendar

From this perspective, one can see that we have spread positions at just six different strikes, which I hope might make it a little easier for members to match up the Calendar Options portfolio with their account statements.