Condor Options

We’re further offsetting our portfolio delta risk with the following trade:

Day limit order
Buy to close 1 SPY Apr 138 put
Sell to close 1 SPY Apr 135 put
Sell to open 1 SPY Apr 135 put
Buy to open 1 SPY Apr 132 put
for a net debit of $0.47 or better.

Note that the 1 contract per leg specified above represents the number of puts currently long at the 135 strike. The net effect of this (butterfly) trade is to roll down the lower half of last Thursday’s butterfly hedge, turning it into a put condor. Traders whose trading platform automatically translates orders to “open” or “close” contracts can enter this order as a 132/135/138 put butterfly.

Analysis: As long as the current uptrend hasn’t suffered a major technical breakdown, we’re keeping adjustments small and incremental—experience has shown that whipsaws generally are more damaging than trend reversals, especially when that change is accompanied by a favorable shift in implied volatility. So with this trade, we’re reducing delta (as a percentage of total dollars at risk) by just under one-half. Net vega is still positive, which continues to provide a cushion to support us in strong sell-offs.

There are two ways to view this afternoon’s trade. For the sake of convenience (and sanity), I’ve labeled it an adjustment to the existing April put butterfly position. Now we have an April 132/135/138/141 put condor—nice and simple.

But taken on its own, this trade adds another put butterfly to our portfolio. Why is this important? Because that’s what the Calendar Options strategy calls for. When implied volatility surges, we sell vega instead of buying it. That way, whipsaw reversals aren’t as damaging, and with butterflies, as with condors, the effects of higher implied volatility are neutralized at expiration (which is not the case for calendar spreads).

Given our closer-to-neutral vega, increasing (negative) gamma (which always happens as time to expiration decreases), and even higher probability of profit, our focus now, more than ever, is on delta and gamma. We’re reducing both (gamma was –3.1% of capital at risk, and now it’s about –1.8%; delta was more than 5.3%), and the results are evident in our new portfolio P/L graph:

But again, this is a conservative, incremental adjustment. If stocks keep dropping, we’ll have to enter another (bearish) position before the April cycle is over. [After-hours note: At the close this afternoon, SPY was trading within $0.75 of our new risk-management share-price threshold. That means there's a chance we might be on watch for entering another downside hedge position tomorrow.]