Condor Options

We’re rolling half of our December/January position at the 118 strike up to 123, with the following order:

Day limit order
Buy to close 2 SPY Dec 118 puts
Sell to Close 2 SPY Jan 118 puts
Buy to open 2 SPY Jan 123 calls
Sell to open 2 SPY Dec 123 calls
for a net debit of $0.21 or better.

Note, again, that the 2 contracts specified above represent *half* of our current position in the Dec/Jan 118 put calendar.

Analysis: December expiration is only nine days away, and it shows in our risk profile. Gamma and vega risk are growing for our December positions, but so is theta—which is why we’d like to keep the positions open at least until Friday, carefully monitoring portfolio delta to make sure we don’t let our current 2% unrealized gain turn into a significant loss. With this adjustment trade, we’re offsetting virtually all of our negative delta, reducing it from more than 2% of total capital at risk to about 0.3%.

Our December portfolio now consists of three double-calendars, with the combined risk profile shown below. Note that we’re again looking at the expected P/L curve for the Wednesday before expiration rather than the (largely hypothetical) expiration graph. We’re still using the expiration model to calculate breakeven points and probabilities, however, because that’s the conventional approach for comparing the risk/reward potential for option spreads.

For the first time in a while, we may split a calendar position twice, rolling half of the remaining contracts at 118 up to a strike above the market, if the S&P stages a successful breakout. The ideal scenario (besides an unlikely drift sideways at this pivotal technical level) would be a move that stops short of SPX 1240, avoiding the need for further adjustment, followed by a retest of the 1230 level that gives us an opportunity to start unwinding our positions on a rebound in implied volatility. If, on the other hand, the bulls continue to charge higher, our plan is to keep rolling our positions up into Friday, and then start closing positions to reduce risk.