As promised in last night’s Update, we’re adjusting this position again this morning, with the following order:
Day limit order
Buy to close 1 SPY May 120 call
Sell to close 1 SPY Jun 120 call
Buy to open 1 SPY Jun 108 call
Sell to open 1 SPY May 108 call
for a net debit of $0.60 or better.
Note that the 1 contract specified above represents half of our remaining position at the 120 strike and one-fourth of our original position.
Analysis: Our strategy to combat rising market volatility is to spread out our portfolio—by adding positions if implied volatility is relatively low, or by rolling contracts to a new strike when IV is at a level where we don’t want to increase vega risk. Yesterday, with implied volatility at about 23%, we rolled half of our position at 120 down to 116 to form a double-calendar. Now IV is close to 40%, so we’re taking a small profit on half of the remaining contracts at 120 and buying a downside hedge at 108, to form a wide triple-calendar.
More important, the greeks of this trade are perfectly in line with our strategy: We’re reducing our base-position delta by about 42%, while almost doubling theta and keeping vega about the same. Retaining nearly all of the position’s vega lets us keep that hedge against rising implied volatility; but we also want to avoid the risk of “vol crush” in a sharp upside reversal, so we’re not adding vega with the VIX higher than it’s been in more than a year.
When we have a triple-calendar, we normally set our risk-management price thresholds at the outer strikes. In this case, however, our position has a pretty strong bullish bias, so we’re setting our upper adjustment point just short of a third of the distance between the upper strike and the upper breakeven. Our new risk profile, pictured below, still has a lot of positive delta—but the sharp reaction rallies that characterize volatile markets are as much our enemy as a continuing sell-off, so our strategy is to stay just ahead of the market, whatever its direction, and take our profit when the tables turn…ideally, close (but not too close) to expiration.