Condor Options

In last week’s Update, I talked about the risks and rewards of trading calendar spreads on individual stocks, emphasizing the importance of keeping positions small and diversifying risk among several (relatively uncorrelated) stocks, as well as across time, strike prices, implied volatility and vega (the latter four are already built into our core trading strategy). This week we saw how bad things can really get for a negative-gamma portfolio when the underlying equity price begins to swerve out of control. I’ll publish a post detailing the damage and giving an analysis of what happened and what we’re planning to do about it tomorrow evening—but for tonight I’m focusing on our current open position.

Our SPY April/May double-diagonal had already built up a small profit cushion by Friday’s close. In terms of unrealized return on capital at risk, we were sitting at about +2.4%; for traders whose brokers hold margin on each diagonal separately, that translates to a +1.1% return on net capital. We’re virtually delta- and vega-neutral, with only 25% of our Model Portfolio capital at risk—no better place to be as we await tomorrow’s reaction to developments in the Libyan situation over the weekend.