Condor Options

With SPY near $127, we’re neutralizing portfolio delta and selling some additional premium by rolling the short December 125 calls up to the 128 strike, with the following order:

Day limit order
Buy to close 2 SPY Dec 125 calls
Sell to open 2 SPY Dec 128 calls
for a net debit of $1.76 or better.

Note that the 2 contracts specified above represent our entire short position in the Dec 125 calls.

Analysis: Given the moderate, but significant, long net vega of our current portfolio, we want to tip delta back to the positive side ahead of what we have every reason to believe will continue to be volatile, risk-on-risk-off trading through expiration. This adjustment is somewhat discretionary, in that we’re neither entering a third core position for December nor hedging in response to a risk-management trigger. That said, it essentially falls into the same category as the former, because we’re:

• Selling additional premium;
• Resetting our portfolio risk profile to market-neutral; and,
• Distributing risk more evenly across a wider range of underlying share prices.

To quantify the benefits in numerical terms, this trade shifts portfolio delta, as a percentage of capital at risk, from –1.3% to +0.4%, adds no volatility risk, and widens our expiration breakevens enough to increase probability of profit to about 66%. We now have almost $10 (nearly 8%) between projected risk-management price thresholds. And like our last trade, this adjustment boosts theta per dollar at risk by about 8%, while only marginally increasing gamma.

I know that all the numbers and mathematical parameters are overwhelming to a lot of members, so I’ll wrap up this trade analysis with a less technical summary: By rolling our in-the-money calls to slightly out of the money, we’re increasing profit potential, decreasing directional—and overall—risk, and reducing the odds that we’ll have to make any further adjustments. In addition, we’re freeing up a little margin in case we need it for one more hedge trade or, ideally, to get an early start on the January cycle.