Condor Options

Implied volatility for May increased since a week ago, without a corresponding rise in June IV. This has effectively offset the time-decay we normally would have seen last week, making it difficult to start unwinding our positions as we normally would be doing by now. Both of our portfolios have wide range between risk-management delta thresholds, so from that perspective, we can afford to stand firm and look for a little more time decay; on the other hand, we still have to worry about volatility risk as we approach expiration.

Typically, back-month implied volatility falls off in the latter half of expiration week, which would hurt the value of our long June contracts. We’ll see what happens today, and possibly take off some of our SPY butterfly hedge to rebalance risk before the end of the session if the S&P continues to move higher.

The XLE Supplemental Trades portfolio still carries very little volatility risk (at least according to the software model we use), and it, too, is spread out widely enough to make an adjustment triggered by underlying price movement pretty unlikely. The risk here is theta (and the unusual volatility skew noted at the beginning of this post). With XLE at the center of our risk curve, our net theta soon will become negative—at which point we’ll have to start closing the negative-theta trades and, if we can’t do that in a way which results in a reasonable risk profile, flattening out entirely.

(Traders who like to take bets on price movement, or lack thereof, could do a number of things to try and make up a little more of the loss we’re taking on XLE this month. But it’s not our style to take on more risk in expiration week, much less to speculate on where the share price will be on expiration Friday.)

This is the status of our open positions as of about 11:30am Eastern today.

Core Portfolio

The current unrealized loss for our May SPY portfolio is approximately 10.6% of total capital at risk, with the increase due, again, to the abnormal rise in May premium approaching expiration. Our probability of ending the cycle with a profit is now zero—unless we get a sharp reversal in implied volatility and volatility skew. Whatever perceived risk is causing May IV to rise into expiration will, of course, be irrelevant by Friday afternoon.

As the risk profile above shows, our delta is close to neutral, and gamma has decreased as I predicted last week. Nevertheless, as I mentioned above, we need to keep a close eye on the greeks and take off risk as appropriate—which given the strong rally we’re seeing intraday, means we’ll probably close at least some of our put butterfly hedge position this afternoon.

A summary of our open positions is available on the Portfolio page.

Supplemental Trades

After a calm opening, XLE is yet again exhibiting much more volatility than the S&P today. Again, that doesn’t affect us much considering the low delta, gamma and vega of our current portfolio—but it’s a sign that we might want to get out while we can (before the next 2.5% gap day). Our current unrealized loss has come down to about 7.7%, so last week’s adjustment strategy appears to be paying off. Unfortunately, we no longer have any realistic chance of gaining back much more.