We’re opening the following position to hedge our upside exposure:
Day limit order
Buy to open 2 SPY May 143 calls
Sell to open 2 SPY Apr 143 calls
for a net debit of $0.83 or better.
Note that this is not a core p0sition, so the 2 contracts specified above represent a number of contracts equal to the number allocated to our initial, Apr/May double-diagonal position.
Analysis: Welcome to expiration week. If we were pursuing a run-of-the-mill calendar-spread strategy, gamma would be through the roof. But by spreading risk over time and strikes, we’ve created a risk profile that, while still a bit volatile in the short-term, is about as close to ideal as one can get with a calendar-centered strategy less than three days before expiration. (Okay, sure—this month we’re more invested in butterfly and condor hedges than in calendars, but that hedging strategy is what distinguishes Calendar Options from the pack.)
Bottom line: This trade shifts our breakevens and projected adjustment price thresholds up by about $1.50, while reducing gamma in proportion to capital at risk. Net vega is still positive, and we’re adding delta to fit. Best of all, despite—well, actually, because of—the back-and-forth market swings over the past week, our probability of at least ending up with a profit at expiration goes up to more than 85% with this trade.
Our new projected risk-management price thresholds are approximately SPY $137.5 on the down side and $141 overhead. And, again, unlike a typical calendar-spread strategy, our current portfolio gamma risk will actually decrease (slightly) through expiration week.