Condor Options

We’re opening a third double-calendar for November expiration (note that we’re again using calls at both strikes):

Day limit order
Buy to open 2 SPY Dec 123 calls
Sell to open 2 SPY Nov 123 calls
Buy to open 2 SPY Dec 120 calls
Sell to open 2 SPY Nov 120 calls
for a net debit of $2.06 or better.

Note, again, that 2 contracts per leg is our base-position size for double-calendars. Trading whole-number multiples of the base size ensures that adjustments will not result in unbalanced positions. Also note that matching our Model Portfolio risk profile requires a risk-based allocation strategy—i.e., putting an equal dollar amount into each initial position (prior to any adjustments).

Analysis: SPY has breached $119.50 twice before in the past six trading days, but each time it quickly fell back. Today it found support after a minor pullback, putting us under pressure to the upside if the market makes a big move tomorrow, a day packed with event risk. There’s a good argument to be made that the market already has priced in the election results, and that the Fed is unlikely to surprise—but our strategy focuses on managing our risk profile based on current conditions, not speculation on what may or may not move the market.

Veteran members know that when we have more than two open positions, we start to concentrate almost exclusively on portfolio-level risk-management. As the Portfolio Analysis table above shows, this trade is on the aggressive side of our delta-adjustment range, bringing us to a virtually neutral position. But considering our current vega risk, slashing nearly all of our negative delta is precisely what’s called for.

Given our 6% vega, the neutral-looking risk profile below is actually decidedly bearish-leaning. Another aspect of the Calendar Options strategy that’s familiar to long-time subscribers but might not be obvious to newcomers is that any directional bias we might take is based on the expectation of mean-reversion, not on any particular bullish or bearish thesis. Yes, this trade neutralizes more delta than usual, but it complies with our strategy rules and, again, takes this week’s unusually high event risk into consideration.

While our portfolio risk profile is what’s important at this point, it’s important to understand the hedge value of this afternoon’s trade. As the position risk profile below shows, this trade has a strong bullish bias—again, not because we’re especially bullish, but because we want to balance our risk in case of a move in either direction.

We chose a double-calendar again because we wanted a position centered at about $121.50, and we used calls at both strikes because of the more favorable implied-volatility ratio. We now have a very wide range between adjustment points, so we should be able to sit back and relax for the next few days while the market digests the election, Fed policy, and (Thursday and Friday) the employment numbers.