Condor Options

We’re continuing to sell volatility into the upswing, and using these trades to offset our bullish delta. This afternoon we’re opening the following position:

Day limit order
Buy to open 2 SPY 137 puts
Sell to open 4 SPY 133 puts
Buy to open 2 SPY 129 puts
for a net debit of $0.92 or better.

Note that the 2 contracts specified above for the outer strikes represent the same number of contracts currently allocated to our open April/May 136/139/143/145 double-diagonal.

Analysis: [Full disclosure: This analysis was written with the benefit of hindsight...nevertheless, it accurately reflects my thoughts, and the Calendar Options strategy, at the time of the trade.]

The rubber band is stretching, and as noted in yesterday’s trade analysis, we’re adjusting to the increased downside risk incrementally, in anticipation of an abrupt snap-back. Thus, our new portfolio delta is higher than our usual target given nearly neutral vega—but this is a hedge trade, not a core position, and therefore we’re focused more on how much we’re reducing risk than on an absolute target. This trade cuts our delta bias, as a percentage of total capital at risk, by almost two-thirds.

With portfolio vega at about 2.2% of capital at risk, we’re not necessarily looking to reduce that (after all, this is a long-vega strategy)—but when implied volatility spikes in what remains an unbroken up trend, we prefer to sell volatility into that spike. So this trade does bring us closer to vega-neutral, but we still have our signature positive-vega bias.

To round out the numbers, we’re increasing theta from about 0.58% to more than 0.85% and slightly reducing gamma. (Managing by the greeks is fun, isn’t it? Well, maybe not so fun unless you’re a mathematician like I am—but it’s an important skill for making a business out of selling options.) Here’s our new P/L profile after this trade:

Our new projected risk-management price thresholds are approximately SPY $135.20 and $139.50. However, we’ll probably adjust this latest hedge position to delta-neutral on a close above about $138.10.