Condor Options

As planned, we’re rolling a portion of our current November butterfly hedge into a delta-neutral iron condor, as follows:

Day limit order
Buy to close 1 SPY Nov 119 put
Sell to close 1 SPY Nov 125 put
Sell to open 1 SPY Nov 132 call
Buy to open 1 SPY Nov 138 call
for a net credit of $1.84 or better.

Note that 1 contract per leg represents the number of contracts we’re long at the 125 strike (one-third the total number of contracts we’re currently long at 113).

Analysis: The two-day rally that began as soon as we established a downside hedge position already has triggered a signal to unwind part of that position. The 113/119/125 put butterfly still isn’t losing value from time-decay, but we now find ourselves with negative delta.

This trade neutralizes the delta for one-third of the total hedge position, turning that portion into a 1-lot (per base-postion unit) iron condor. We’re moving from a 0.4% negative delta bias, in proportion to total capital at risk, to about 0.4% positive. Both are pretty much neutral, so why bother? Because of the simultaneous effect on vega and, especially, theta.

Even though –0.4% delta is small, it’s leaning the wrong direction when we have positive vega. We’re remaining essentially delta-neutral but reducing vega from about 1.2% of capital at risk to less than 0.4%. The more significant improvement, though, comes in terms of time-decay—and therefore, potential profit—at the upper end of our P/L curve. The effect on theta at the current moment and underlying price isn’t significant, but as shown below, our longer-term upside profit potential and projected upper breakeven improve quite a bit.

After this adjustment, our estimated breakeven over head is about $131.85, and our top-side risk-management price threshold is around $128.50—about $2 and $3 higher, respectively, than before today’s trade. If the market continues to rally, our first step will be to unwind the rest of the butterfly position in a similar fashion, thus lifting the right side of the portfolio risk curve even more. After that, we’ll start looking at adding a new position…or, if traders turn strongly bearish, possibly rolling the remaining butterfly position down.