Condor Options

We like to have at least three weeks left before expiration when we initiate a calendar-spread strategy, so it’s now or never if we’re going to have a Supplemental Trade this month. The Bonus Trade I mentioned Tuesday still looks like the most reasonable calendar-spread opportunity available right now, so we’re making it an official Supplemental Trade with the following order this afternoon:

Day limit order
Buy to open 4 MCD Jul 67.5 puts
Sell to open 4 MCD Jun 67.5 puts
for a net debit of $0.75 or better.

NOTE: As a Supplemental Trade, this trade is optional and is primarily intended for more experienced/risk-tolerant subscribers. It will not be autotraded, and it has no bearing on our core newsletter portfolio; however, we will follow up by posting any additional entry or adjustment trades that the Calendar Options risk-management approach may call for. Also note that it’s important for anyone who chooses to participate in Supplemental Trades for a given cycle to follow all Supplemental Trades in that cycle, in order to match our risk-management profile.

As usual, four contracts is our base position for single-calendars. Trading whole-number multiples of the base size ensures that adjustments will not result in unbalanced positions.

Analysis: With the June at-the- money calls trading at an implied volatility of 21.3%, MCD just barely passes our new criteria for managing volatility risk in the entry trade; IV for the puts, however, is at a more reasonable level of 18.5%, and the ratio of front vol to back vol is more than 98% (compared to less than 94% in the calls). So the level of risk in this trade appears to be quite acceptable (assuming an appropriately sized position) despite the persistence of relatively high volatility in the broader market.

Though technical analysis isn’t a central component of our strategy, the chart of MCD shows some technical factors in our favor. To the upside, where we have positive vega working against us, there’s resistance in the $68.50 area from the 50-day and 20-day moving averages. (We’re also starting out with a little positive delta for upside protection.) In the other direction, support at the most recent low ($65) and the rising 200-day moving average (currently approaching the $62 level)—as well as increasing implied volatility—should help us keep the position under control in the event of a sell-off.

Here’s the risk-profile graph at the time of our trade: