Condor Options

With SPY over $127, we can afford to reduce our downside hedge position. We’re rolling another portion of the November put butterfly into a delta-neutral iron condor, with the following order:

Day limit order
Buy to close 1 SPY Nov 119 put
Sell to open 1 SPY Nov 125 put
Sell to open 1 SPY Nov 133 call
Buy to open 1 SPY Nov 135 call
for a net credit of $0.87 or better.

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

Analysis: We’re continuing to unwind the butterfly hedge we opened and then added to on November 1, with a twist. Like last week’s adjustment, we’re selling an iron condor which, combined with the butterfly, leaves us short an iron condor that we hope to have expire worthless. The difference is that we’re selling a higher strike than last time, and keeping a tighter limit on risk (and margin) with a closer strike at the top end. Three reasons for these differences:

1. The underlying (SPY) price is higher, so we have to sell a higher strike in order to get the risk profile we want, for this part of the position (neutral delta) and for our overall portfolio;
2. The additional risk of a wider call spread is no longer worth the small amount of additional net premium we’d take in; and,
3. We’re preserving buying power with a narrower spread, so there’s something left for the next move, if needed.

The latter is somewhat incidental—that is, it’s not an explicit Calendar Options strategy rule—but we recognize that a strategy isn’t practical if there isn’t some limit on how much margin is needed to follow it.

As shown above, we’re sitting on a small profit now—and a not-so-small mound of (negative) gamma. Nevertheless, our projected probability of being profitable near expiration (expiration Thursday is the red line on the graph), with no further risk-management,  is a relatively comfortable 67%. On the other hand, it’s time to start thinking about paring back our total risk in any additional action we take with regard to the November portfolio, so our next step, should the rally continue, will likely be to close the remaining butterfly position before thinking about possibly opening an upside hedge.