Condor Options

Throughout the past week of hedge trading, I’ve noted that, given the current “buy the dips” mood among investors, we wanted to hedge incrementally, to avoid being hurt irreparably in a snap-back. While hardly aggressive, Tuesday’s butterfly hedge #2 did take a hit today, though, losing about 30%. The adjustment this afternoon was our way of unwinding that delta hedge without locking in the full loss (and selling additional premium to recoup a little more). At this point, our potential Model Portfolio return is still close to where it was when we started out the cycle.

That said, this week’s tough whipsaw brought our current unrealized return on total capital at risk (which, however, is now a significantly larger proportion of our Model Portfolio capital than it was at the time of the last Update) down to about 2%, for a Model Portfolio return of about 1.1%. Our negative gamma is climbing, but theta is keeping pace, and we’re ending the day nearly delta- and vega-neutral.

We start looking to reduce negative gamma a week before expiration, usually by closing positions. But with nearly half of our Model Portfolio capital still available, I’m considering ways to hedge portfolio gamma with new, potentially profitable, positions.

Exactly how that might work depends on which direction—and how much (or little)—the market moves Friday. Regardless, our new risk-management watch points heading into expiration week are SPY $137.70 and $141.10. Not a whole lot of wiggle-room, but it will do quite nicely if we get just one or two relatively  “normal” days (the implied daily move at the end of today’s session was less than 0.85%).