We’re reversing Adjustment #3 by rolling our contracts at the 99 strike up to 109, as follows:
Day limit order
Buy to close 1 SPY Jul 99 put
Sell to close 1 SPY Aug 99 put
Buy to open 1 SPY Aug 109 put
Sell to open 1 SPY Jul 109 put
for a net debit of $0.52 or better.
Note that the 1 contract specified above represents our entire position in the 99 put calendar (1/4 of our original position).
Analysis: This position has been hit hard by last Friday’s whipsaw and the subsequent collapse in implied volatility—nevertheless, the strategy calls for using our trading rules to stay in the game as long as we can reasonably manage risk. The odds of this position ending up profitable are virtually nil, but what the Trade Analysis table and the risk profile (below) don’t show is that with this adjustment, we have about a 45% chance of reducing our loss, potentially by more than half, by the middle of next week if we don’t need to adjust again. Of course, the latter depends on technical resistance in the SPY $107–$108 range holding back the rally for a few days, without a failure of support in the $103.50–$104 area.
Which is not to say our strategy only works in sideways markets—we’ve proven time and time again that this common misconception just isn’t true. The key, again, is managing risk as the market moves against our position(s). In this case, falling implied volatility and a position value near our loss-level risk-management threshold call for another larger than usual delta adjustment. By rolling up to 109, we’re cutting the delta bias of the position by more than 70%, and reducing our (negative) delta per dollar at risk by about 73%, leaving our portfolio much closer to delta-neutral. The resulting position is still a triple-calendar, but the position is now centered about $2 higher, at around $106:
Another component of our risk-management approach is that our trade-entry criteria have kept us largely in cash during this volatile period, reducing our percentage loss at the portfolio level. There’s still a chance we might employ some of that cash in a hedge position if the rally picks up steam again, but at this late point in the July cycle, we’re starting to focus on opportunities to start building a portfolio of trades for August expiration.