Condor Options

This “adjustment” is actually a partial unwinding of our delta-negative position in this trade. One thesis of our strategy is mean reversion, and a retest of SPX 1080 is more than likely; however, we have a time limit with options, and our primary concern is risk-management. It hurts to lock in a loss, but the pain is worthwhile considering the reduction in delta bias that we’re achieving with this trade and the bigger picture of long-term profitability.

We’re putting in the following order to close the majority of our SPY July/August Calendar Spread:

Day limit order

Buy to close 1 SPY Jul 102 put
Sell to close 1 SPY  Aug 102 put
Buy to close 1 SPY Jul 106 put
Sell to close 1 SPY Aug 106 put
for a net debit of $2.74 or better.

Note that the 1 contract specified above represents 1/4 of our original trade—i.e., our entire position at the 102 strike and half of our position at 106.

Analysis: Someone must have passed out happy pills on Wall Street this week, as the market continues to grind higher on low volume with little rational cause. The media are playing the Correlation Game, linking today’s rally to expectations of positive earnings—but the fact that the rally in S&P futures began at 3:00am edt, almost twelve hours after Alcoa’s strong earnings were released and well before any other major earnings announcement, makes such a facile explanation appear dubious.

Whys and wherefores aside, our objective is to manage risk as market conditions change, and with this trade we’re reducing our position delta bias by about 56% and overall portfolio delta by about 42%. We’re also taking nearly 20 points off our base-position portfolio vega, which had reached about 80 prior to this trade. We still have a strong bearish bias, with a base-position portfolio delta of about –62—but that’s okay for now, considering how extremely overbought the market is on the intraday charts. Overbought conditions can persist for some time, though, so we’ll have to remain on alert to unwind our remaining July positions if we don’t soon see evidence that the bulls are losing steam. (Note that, at $109.86, SPY is already above our new portfolio price-level risk-management threshold.)