Condor Options

Yesterday’s breakout in IBM turned out to be anything but. So, for the first time, I’m publishing an adjustment trade for dealing with whipsaws when the whipsawed position is a butterfly hedge. We’re rolling down the bottom half of March Butterfly Hedge #2 with the following order:

Day limit order
Buy to close 4 IBM Mar 170 calls
Sell to close 4 IBM Mar 165 calls
Buy to open 4 IBM Mar 150 puts
Sell to open 4 IBM Mar 155 puts
for a net credit of $0.82 or better.

Note that the 4 contracts specified above represent the number of contracts we’re currently long in the IBM Mar 165 calls. For anyone who hasn’t already noticed, the above order is an order to sell an iron condor.

As a Supplemental Trade, this order will not be autotraded. And of course, anyone who did not participate in yesterday’s IBM 165/170/175 butterfly hedge should not place this order.

Analysis: One of the nice things about using a butterfly as a delta hedge is that if we’re whipsawed, we can easily unwind the delta without locking in all of the loss. This can be especially effective in the case of an upside butterfly hedge—on a reversal we can sell an iron condor at an elevated implied volatility to turn the butterfly into another iron condor. This is what the risk profile for IBM Butterfly Hedge #2 looks like after this trade:

We’re taking in a $0.82/share credit, and notice that as long as IBM stays above $155, we stand to recover most of the current unrealized loss.

At the portfolio level, which is our main focus, we’re cutting our beta-weighted delta per dollar at risk from about 3% to about 1%. Our net portfolio vega is now negative—very helpful if today’s sell-off turns out to be yet another whipsaw—and our probability of profit, with no further adjustment, is still close to 50%.

Our new breakevens are approximately IBM $157.20 and $166.35. Note that we’re extending the projected exit date by a few days, because we now have negative vega and an iron condor position that could be left to expire worthless if IBM stays well above $155 and below $165 into expiration.

The resulting position from this adjustment is an IBM Mar 150/155/70/175 iron condor (see the Portfolio page). Our aggregate portfolio risk profile is shown below:

Our new projected risk-management price thresholds are around IBM $159.10 and $164.35, and we’ve drastically increased our dollar-value profit potential.

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.