This afternoon we’re opening the following position for January expiration:
Day limit order
Buy to open 4 SPY Feb 129 puts
Sell to open 4 SPY Jan 129 puts
for a net debit of $1.17 or better.
Note that 4 contracts per leg is our base-position size for single 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: This trade perfectly fits our latest risk-management rules as well as the preceding ones. SPY reached the point where we could add a position at a strike more than the two-week standard deviation above our current delta-neutral share price, and our portfolio delta bias, as a percentage of capital at risk, is well below our new risk-management threshold.
With this trade, we’re reducing our negative delta bias from about 5.1% of capital at risk to about 0.8%. Vega actually drops from about 6.95% of total capital at risk to about 6.7%. In short, we’re keeping pace with the market trend in accordance with our strategy rules. Our Model Portfolio risk profile after this trade is shown below:
Our new adjustment prices are around SPY $127.55 and $125.05, subject to change with time and IV. Probability of ending up profitable at our latest exit point, with no further adjustment, is over 50% We’ll continue to keep a close eye on the current rally and manage risk accordingly.