Condor Options

We’re in a bit of an up-hill battle this month, with SPY implied volatility in the doldrums and tending to skew toward the March contracts. Nevertheless, the G20 (non-)decision to postpone any commitment to bail out the Eurozone, appears to have kept support under April IV for the time-being. Shortly after the close of trading this afternoon, our one open position was showing an unrealized loss of about 7.5%—which, because we’ve been conservative with our trade entries in the context of a long-term downtrend in implied volatility, translates to an unrealized Model Portfolio return of about –1.9%.

But we’re still in mid-cycle, and our prospects for another profitable month are nearly as good as ever.  As long as April SPY implied volatility remains relatively stable, the Mar/Apr 134/139 double-calendar has about a 47% chance of ending up with a profit in the 10%–15% range at March expiration. And we still have three-quarters of Model Portfolio capital ready to put to work if and when the market picks a direction (for price and for IV).

As the P/L graph below shows, current portfolio delta is virtually dead-even, and potential profit is still significantly greater than current unrealized loss. This is a dividend cycle, however, so there’s an additional risk to consider.

As long as our short positions remain out of the money, we don’t have to worry about assignment (which isn’t necessarily a big deal anyway, but that’s a subject for another discussion…). The more important issues are expiration-week gamma risk and the increase in March premium, as traders factor in the anticipated dividend, that will temporarily depress our net position value.

These risks might dwindle if the S&P continues to diddle around in the 1355 to 1375 range, but the Calendar Options strategy wasn’t built on a presumption of market stability. We still have plenty of time—and Model Portfolio capital—to add to this month’s profit potential on a move either up or down. This week’s projected risk-management price thresholds are SPY $134.40 and $138.30, with possible trade triggers inside that range.