Condor Options

March implied volatility in IBM options is still a bit high for a calendar entry, so we’re hedging the upside with another butterfly, as follows:

Day limit order
Buy to open 4 IBM Mar 175 calls
Sell to open 8 IBM Mar 170 calls
Buy to open 4 IBM Mar 165 calls
for a net debit of $1.02 or better.

Note that the 4 contracts specified above for the butterfly wings represent the same number of contracts in our core, IBM Mar/Apr 165 put calendar position. Also note that as a Supplemental Trade, this order will not be autotraded.

Analysis: We’re hedging our upside exposure here with an out-of-the-money, negative-vega position. Our usual strategy for upside hedges is to open a calendar spread, but with implied volatility plummeting, we don’t want to add to our vega risk.

With this trade, we’re flipping our beta-weighted delta per dollar at risk from about –4.2% to about +0.8%. We’re increasing vega a bit, from 0.4% of total capital at risk to 1.1%, but the flip-flop corresponds to our switch from negative delta to positive.

We’ve increased our probability of profit (the Wednesday before expiration and assuming constant implied volatility) to about 59%. Our new projected risk-management price thresholds are at approximately IBM $161.25 and $166.60.

Our new P/L curve couldn’t be more on target considering our overall risk profile (greeks):

NOTE: Supplemental Trades are optional and primarily intended for more experienced/risk-tolerant subscribers. They are not autotraded, and have no bearing on our core newsletter portfolio; however, we follow up by posting any additional entry or adjustment trades that the Calendar Options risk-management approach may call for. Also note that it’s important for anyone who chooses to participate in Supplemental Trades for a given cycle to follow all Supplemental Trades in that cycle if they wish to match our risk-management profile.