We’re placing the following order for January expiration:
Day limit order
Buy to open 2 SPY Feb 130 calls
Sell to open 2 SPY Jan 128 calls
Buy to open 2 SPY Feb 119 puts
Sell to open 2 SPY Jan 122 puts
for a net debit of $1.10 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). For this trade, the real risk is 122-119 = $300, + $110 = $410 per share ($4.10 per
Analysis: SPY average implied volatility dropped below 22% this afternoon, and with the share price back at $124, we have a valid signal to enter another January position. Yesterday we had a double-calendar trade lined up, but the negative skew between front- and back-month implied volatility increased today, prompting a more conservative, double-diagonal trade.
This new position now dominates our portfolio, shifting our expiration break-evens to approximately SPY $118.60/$129.20. The 107/114/127/130 iron condor is still contributing significantly to our January profit potential—but we manage risk at the portfolio level, and with the addition of this trade, our new projected risk-management price thresholds are around $119.40 and $127.25.
We’re coming out of this trade with a small amount of positive vega and virtually no delta bias. If the market rallies into the end of the year, our first move will be to buy a butterfly, most likely rolling up the short call position at the 127 strike. Depending on volatility skew between January and February SPY options, we might proceed from there with a calendar spread or a butterfly. A market sell-off would provide the opportunity to sell premium, in the form of an out-of-the-money put butterfly. As always, our primary concern is risk-management.
If we’re fortunate enough not to have to trade again this week, I’ll post an update on Friday.