Condor Options

Our second order this afternoon adjusts our remaining downside delta hedge to produce the risk profile we want overnight. We’re selling 1/8 of our contracts in this position, as follows:

Day limit order
Sell to close the XLE May 74 put
Buy to close 2X the XLE May 70 puts
Sell to close the XLE May 66 put
for a net credit of $1.03† or better.

Note that because the total number of contracts currently open depends on risk-based position sizing, we’re not specifying an exact number of contracts. The easiest way to determine the size of this order is to make the number of contracts in each wing equal to 1/8 the number of contracts currently long at the 74 strike (with the center equal to twice that number).

Also note, that we’re working this order in conjunction with the prior one, which has yet to be filled. The two orders have opposite delta and vega, so as soon as we’re filled on one, we’ll update the price on the other to get it cleared.

And finally, note, again, that as a Supplemental Trade, this order will not be autotraded—and, once again, anyone who did not participate in the opening trade should ignore this trade alert.

Analysis: We have two objectives for this afternoon’s trades: 1) Begin to unravel a complex knot comprising five positions, and 2) maximize the chances of further recovering more of our current unrealized loss. Because we’ll probably be able to let the adjusted Butterfly Hedge #2 (iron condor) expire worthless, and we’ve closed the double-calendar, the unwinding process from here on out won’t be as complicated as it might appear to be at first glance. The toughest part, as we experienced today, will be to get filled at reasonable prices in a week filled with perceived risk from economic news.

That said, we’ve kept our portfolio spread out far enough that it can tolerate a wide range of price movement. Still, our top priority is risk-management—in this case, not to lose more in a bad month than we can reasonable expect to gain in a good one. So far, we’re still on track to end up with a Model Portfolio return within our –25% worst-case limit.

With today’s trades, we’re lifting the center of our projected risk profile—while remaining nearly delta- and vega-neutral, retaining the current rate of time-decay, and keeping our risk-management thresholds well beyond a standard deviation from this afternoon’s XLE share price (even based on the elevated level of implied volatility). Our plan is to close out the rest of this portfolio on Wednesday…or sooner, if called for by our risk-management rules.

†Average fill price.

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.