Condor Options

As suggested earlier, we’re repeating this morning’s butterfly trade, only bigger this time:

Day limit order
Buy 2 SPY Nov 125 puts
Sell to open 4 SPY Nov 119 puts
Buy to open 2 SPY Nov 113 put
for a net debit of $1.28 or better.

Note that the 2 contracts specified above for the wings represents double the size of this morning’s trade and the same number of contracts initially allocated to each leg of our current, double-diagonal position.

Also note that half of the order at the 125 strike is closing our remaining short position; for the second half, we’re opening a long position in the Nov 125 puts. This may require placing two separate orders.

Analysis: With the two hedge trades we executed today, our delta bias, as a percentage of total capital at risk, was cut from about 3.7% to less than 1.6%, while keeping vega below 1%. Besides actively managing volatility risk, another thing that makes our approach to risk-management different from simple delta-hedging is that every hedge trade increases potential profit from the options premium we’ve sold. In this case, we’ve gone from a theta—which represents our theoretical daily profit from time decay—of less than 0.6% of capital at risk to almost 1.2%.

For our new breakevens and probability of profit, I’m using the simulated P/L curve for the Tuesday before expiration, rather than right at expiration. In those last three days, our new short position at the 119 strike becomes disproportionately dominant in the overall portfolio risk profile, and if we were to make no further adjustments or additions to the November portfolio, we’d want to close out some or all of the position before that happens.

So as things stand this afternoon, we’re looking at about a 44% probability of ending the cycle with a profit, and we have a profitability range of more than 11 points, or about 9.5%. We’ll consider additional downside hedge trades if SPY approaches $119.50, and we’ll probably make a bullish adjustment in the vicinity of SPY $125.50. (We might even roll down the short November 133 calls to capture additional premium if it becomes apparent that the S&P won’t recover this week’s losses by expiration.)