We’re adding to our February portfolio by opening a second double-calendar, as follows:
Day limit order
Buy to open 2 SPY Mar 135 calls
Sell to open 2 SPY Feb 135 calls
Buy to open 2 SPY Mar 129 puts
Sell to open 2 SPY Feb 129 puts
for a net debit of $2.38 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: It’s almost a week since we entered the first February position, and we’re continuing to allocate capital as time and/or changes in underlying price trigger new trade signals. With volatility holding near the bottom of its range since last July, we needed SPY to go up only about a $1.70 to justify opening a position in a higher strike range and bringing portfolio delta back to the bullish-neutral level that the strategy targets.
This relatively wide double-calendar raises our upper breakeven more than $2 while moving the lower breakeven point up only about $1.75. Portfolio delta shifts from about –1% of total capital at risk to about +1.1%, without a significant change in gamma or vega (again, in proportion to capital at risk). At current implied volatility, the market is pricing in a nearly 47% probability of expiring profitable with no further adjustment.
Our new risk-management alert price thresholds are projected at approximately SPY 125/133, which gives us about a ±3% range around the mid-point. Of course, it’s still early enough in the cycle to add a third core position without a risk-management adjustment signal, depending on whether, and how much, volatility increases or decreases from here.