The S&P looks toppy, but we can’t afford any upside surprises—so we’re rolling our entire position at the 108 strike up to 114, with the following order:
Day limit order
Buy to close 2 SPY Sep 108 puts
Sell to close 2 SPY Oct 108 puts
Buy to open 2 SPY Oct 114 puts
Sell to open 2 SPY Sep 114 puts
for a net debit of $0.18 or better.
Note, again, that 2 contracts represent our entire position in the 108 portion of the 108/111 Sep/Oct double-calendar.
Analysis: First and foremost, this trade cuts our portfolio delta, as a percentage of capital at risk, by almost 55%, while increasing vega only marginally. What we’re looking for in these last few days of the cycle is to keep theta high (this adjustment boosts theta in proportion to risk capital by more than 40%), to manage delta, gamma and vega risk, and to lock in whatever gains we can on any move in the direction of mean-reversion (i.e., down).
Here’s is what our risk profile looks like after this trade:
Long-time members know that our strategy calls for exiting all of our positions no later than the Wednesday afternoon or Thursday morning before expiration, and that we don’t enter any new trades after the Friday or Monday before expiration. But extreme market action sometimes calls for extreme measures (newer members rest assured, this is not a typical month—we usually do our best to avoid dealing with expiration-week volatility), and the odds we’re getting buying hedges at lower and lower implied volatility, with the S&P less than 10 points away from major resistance and IV tentatively probing 4-1/2 month lows, argues in favor hanging on a bit longer.
And let’s not forget the quarterly dividend issued to SPY shareholders as of Thursday’s close. We’ve been concentrating on put calendars to avoid the assignment risk, but also to sell the premium that gets factored into puts ahead of ex-dividend. The catch is that we can’t book that premium until the ex-dividend date…Friday. For experienced members, we’re taking things to the next level; less experienced traders may prefer to reduce risk by closing positions instead—but in any case, here’s what we’re planning to do:
If the S&P keeps going higher, we’re going to buy another Sep/Oct calendar spread to hedge our negative delta, with the intention of holding it for only a day or two. Beyond that, we’ll be looking to close bearish positions to keep risk in line if the bulls succeed in breaking through resistance around SPY $113.25.
Again, the risk and trading frequency involved in this down-to-the-wire approach aren’t for everyone (even for us, as a rule), and it isn’t the norm for our strategy. Veterans ready to try stepping up their game will learn more about expiration-week trading; less experienced members may want to avoid the volatility and close the two remaining September positions tomorrow or Wednesday (depending how much risk they can tolerate).
As Jared wrote about extensively in his Portfolio Update for the week (available only to Condor Options iron condor newsletter subscribers), we’re always looking for better ways to smooth out the volatility of our returns in extreme markets, but “careful position sizing and realistic expectations are the best prevention against unforeseen outcomes; i.e., no trader ever went broke by allocating capital conservatively.”