Condor Options

With implied volatility for SPY options back in the lower ¼ of its range since taking off in August, we’re opening a double-calendar as our second core position for this cycle, as follows:

Day limit order
Buy to open 2 SPY Jan 131 calls
Sell to open 2 SPY Dec 131 calls
Buy to open 2 SPY Jan 123 puts
Sell to open 2 SPY Dec 123 puts
for a net debit of $3.15 or better.

Note that 2 contracts is our base position for double-calendars. Trading whole-number multiples of the base-position size ensures that adjustments will not result in unbalanced positions. In addition, in order to come as close as possible to matching our Model Portfolio risk profile, it’s important to allocate equal risk to each initial opening trade in a cycle. (Hedge positions may vary).

Analysis: I started out writing an introduction to this analysis that explains how the Calendar Options strategy manages volatility risk—but it quickly grew into more than a trade-analysis introduction, so I’ll finish that explanation and post it separately in a day or two. For now, the important point is that implied volatility—as represented by the VIX, by an index of SPY options implied volatility, and in the IV for the specific contracts that make up this trade—is now low enough that we’re more comfortable with the risk of adding a little more vega to our December portfolio.

In particular, this trade increases vega per dollar at risk from about 1.6% to more than twice that. Still, the resulting 3.6% is relatively low in comparison to where it would be this close to expiration if we hadn’t started out conservatively.

Although SPY didn’t get close to triggering a risk-management adjustment until the end of the session, our most fundamental technique for managing risk is entering trades at various times and underlying price levels over the course of a given expiration cycle, choosing each new position to bring overall portfolio delta closer to neutral. With this trade, we offset a (suddenly much larger) negative delta bias of about 3% to end up with a marginally bullish +0.4%. We’re also adding theta (which is, after all, the primary way we make our profit)—and in this case, we’re getting significantly more theta per dollar at risk, going from approximately 0.86% to a little over 1%.

As the P/L profile above shows, the probability of our current portfolio being profitable at expiration is still more than 50%, and we’ve adjusted our profitability range for today’s 4.1% melt-up in SPY. Our new projected risk-management price thresholds are approximately SPY $120.25 and $128.25—but if this week’s rally continues at its current pace, we’ll probably make a minor adjustment to the double-diagonal position on a convincing breakout above technical resistance in the $126–$126.50 range.