Condor Options

A couple of years ago, a member told me he feared becoming a member of “The Daily Adjustment Club”.  I think of that phrase every time extreme market swings force us to adjust two or three days in a row, and I’ve made minimizing trading frequency a goal for each new refinement to the Calendar Options strategy. We’ve been successful in reducing trading frequency overall, but the market will always have rare periods where it whips back and forth to the extreme.

That said, one key to the success of our strategies is to deal with those periods the best we can so as to minimize losses. It’s very unusual to have two adjustments in one day, and even more unusual to have four adjustments in three days—but that’s the hand we’ve been dealt with our XLE Supplemental trades this month.

We haven’t gotten a risk-management trade signal yet (nor a stop-loss signal from our newly added volatility-based risk-management indicator), but given the wild moves XLE has been making, we’re planning to reduce our risk heading into the weekend in any case, by neutralizing portfolio delta. We have two options: 1) Unwind yesterday afternoon’s second butterfly trade and lock in the loss, or 2) Convert the trade into an iron condor that contributes to our potential to recover more of our current unrealized loss. The former frees up margin; the latter more than doubles our current margin requirement in the XLE portfolio.

Our primary choice is for the latter, as it illustrates an important method of adjusting butterfly hedges. But for members who don’t have the available margin (or the ability to come up with it intraday), we’ll also track the portfolio risk profile for the former. Look for a trade alert, or an update, early this afternoon.