Condor Options

We’re adding the following downside hedge position ahead of expiration week:

Day limit order
Buy to open 3 SPY Apr 137 puts
Sell to open 6 SPY Apr 135 puts
But to open 3 SPY Apr 132 puts
for a net debit of $0.23 or better.

Note that the 3 contracts specified above for the “wings” (outer strikes) represent 3 times the number of contracts per leg in BF (now condor) #1 and 1-1/2 times the number allocated to our core Apr/May double-diagonal position.

Analysis: I’m taking a new look at an approach that has worked before with regard to our strategy of managing gamma risk in (before) expiration week. Out-of-the-money hedges can reduce gamma—not necessarily immediately, but more so closer to expiration—and that’s what we’re accomplishing this afternoon.

This trade cuts our current delta per dollar at risk from approximately 4.2% to about 3%…not a lot, but taking a look at our projected P/L curve for next Friday (Friday before April expiration; the red line in the figure below), it’s clear that we’ve substantially increased the odds of achieving our target average monthly profit.

We’re slightly increasing gamma, but only in proportion to higher theta. We’re closer to vega-neutral by about 27%, which could hurt us in the short-term but be a significant advantage in the long-run (i.e., if and when there’s another reaction rally).

In this (continuing) news-driven, risk-on/risk-off, market—with earnings further magnifying volatility—we’re keeping a tight rein on risk while preserving our profit potential. Once again, though, it’s looking more and more like we’ll have to follow through into expiration to realize that potential…with eyes now on projected risk-management price thresholds of SPY $137 and $139.80.

Interesting times…