The iron condor we rolled into from December’s double-diagonal, combined with the January/February double-diagonal we entered this week, has held up well in the face of Santa Claus Rally 2011. SPY is up nearly 4% on the week, and the VIX has dropped more than 14%—very hostile conditions for a less robust calendar-spread strategy than ours—but at Friday’s close we were still showing an unrealized gain of almost 2.4% on total capital at risk and a Model Portfolio return of approximately 1.1%.
Our primary risk at this point is to the upside, of course, as SPY closed about $1.60 below our projected risk-management price threshold (currently about $127.50). Portfolio vega is nearly neutral, but our delta bias exceeds 1.5% to the bearish side. Any move we see next week would, like this week’s slow but steady grind upward on low volume, be suspect. So our strategy is to make conservative adjustments, if called for by our risk-management rules, keeping in mind the strong possibility of a hard reversal sometime before January expiration.
Our portfolio risk profile at the bell Friday afternoon is shown below:
Given the persistent negative skew between January and February SPY options, our next move, if and when triggered by our risk-management rules, probably will be a butterfly hedge position, whichever way the market turns. The U.S. markets are closed Monday, so I’ll post another update Tuesday morning.