Market makers are playing hard-ball with our order to close the Jan/Feb 127 call calendar, so we’re going to turn that demand for premium to our advantage as we wait for buyers to give up the extra penny. We’re opening the following position for February expiration:
Day limit order
Buy to open 2 SPY Mar 128 calls
Sell to open 2 SPY Feb 128 calls
Buy to open 2 SPY Mar 123 puts
Sell to open 2 SPY Feb 123 puts
for a net debit of $2.01 or better.
Note that 2 contracts per leg is our base position for double-calendars. We expect to place an order to open our first February position shortly. Trading whole-number multiples of the base position ensures that adjustments will not result in unbalanced positions. In addition, note that matching our Model Portfolio risk profile requires allocating capital based on risk (i.e., putting an equal dollar amount into each opening trade).
Analysis: We’ve rolled a good part of our January positions out to February this afternoon, balancing out our delta and gamma risk in the process. All three trades were chosen with risk-management at the forefront.
By closing our position at the 127 strike and reducing risk in the 129 put calendar, we cut back our gamma risk and spread out our January expiration breakevens. This February position, uncharacteristically, has negative delta, because it’s offset by the positive delta of our remaining January positions. When the time comes to close out the latter, we’ll open another February position to compensate for any excess delta, positive or negative.
At the closing bell this afternoon, we’re virtually delta-neutral, and our probability of profit the Tuesday before expiration is nearly 63%. Our risk profile looks more like a condor position than a calendar spread—and that’s a plus as we approach January expiration week.
We’re now well-positioned for the coming week—and if any risk-management is called for, we have plenty of cash for new trades that offset our delta risk, if that’s what our strategy rules call for. Otherwise, we’ll continue to pare back risk by liquidating January positions and look forward to additional income in the February cycle.