Condor Options

We’re opening the following position for April expiration:

Day limit order
Buy to open 2 SPY May 145 calls
Sell to open 2 SPY April 143 calls
Buy to open 2 SPY May 136 puts
Sell to open 2 SPY April 139 puts
for a net debit of $0.37 or better.

Note that 2 contracts is our base position for double-diagonals. 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). In this case, our real risk is $3.37/share ($337 per contract), which means we would allocate six contracts for a $2000 position size. However, note that Reg-T margin requirements will make the total margin held on those six contracts over $3000.

Analysis: Implied volatility for SPY options is again near the low of its recent range—but realized volatility is lower, which means there’s still risk in getting long vega. We mitigate that risk in this trade by adding a vertical component on each side of our double-calendar. The greater distance between strikes in the puts is just to balance out volatility skew and get a nice, neutral risk curve.

Delta: neutral. Vega: relatively small. Probability of profit at expiration is, if anything, above the average for Calendar Options trades…but remember, we change the odds as the market changes by adding positions and hedging with theta-positive trades.

We have a fair amount of room to the downside, but if the market keeps rallying…well, then, we’ll keep buying volatility cheaper and cheaper to hedge upside delta. Should be another interesting month.