With SPY at about $137.30, our risk-management trade signal is no longer valid. We have more than a two-point margin to the downside before we hit our expiration-Friday break-even, so we won't be making any modification to our positions this afternoon.
As of 12:57pm Eastern, we have an active risk-management trade signal. During expiration week, we’re careful to focus on reducing risk (gamma, in particular)—especially in a news-driven, risk-on/risk-off environment. If SPY doesn’t rally back above $137 and hold that level through the afternoon, we’ll be making another adjustment to our hedge position in the last hour to hour-and-a-half of the session.
The roller-coaster ride continues today, with the S&P 500 index currently up 1½ percent and market sentiment running solidly bullish. If SPY is still above $125.60 around 2:30pm Eastern, we’ll adjust at least some of our November butterfly hedge position. Note that we’re planning to roll up by selling an iron condor, which will require about $425 in margin per contract rolled.
As if it weren’t clear enough by now, the chances of making an adjustment trade today are slim. On the other hand, SPY is approaching the high point of our current P/L curve, and with only three trading days left in the cycle, I can’t think of a better reason to lock in our October profit.
I’ll start sending out the trade alerts (or an update) shortly.
It’s been a see-saw morning, with SPY retracing virtually the entire $1.25 pre-market rally and then running all the way back up to $120.75 after better-than-expected housing-market numbers. At the moment we still have a tentative signal to adjust BF#2—but since we normally make adjustment trades on end-of-day signals, and the immediate downside threat has waned, I’m inclined to wait until the last hour of the session as long as support holds in the SPY $120 to $120.25 range.
SPY briefly triggered a downside adjustment signal during the last 15 minutes of trading yesterday. This morning S&P futures are up slightly, and SPY is above our adjustment threshold in pre-market trading. Nevertheless, we’ll be keeping a close eye out this morning for a resumption of yesterday’s sell-off.
Yesterday afternoon we began closing September positions, on the defensive against a steep rally that appears bent on testing the full range of the SPX 1105–1130 resistance zone. We may have to take more aggressive action next week, but I’ll talk more about that after a look at the status of our positions:
SPY September/October Double-Diagonal (97/102/109/114): Closed at a loss of 22.54% on total capital risked. When we reach our maximum allowable loss range earlier in the cycle,…
The uptrend in the S&P has continued so far today, and SPY is approaching our current portfolio-level adjustment point. Our rule is to adjust on next-day confirmation of a closing price beyond the risk-management price threshold—but we also have a rule that triggers an intraday adjustment trade if a position reaches a loss of 25%…and that’s about where the remaining side of our Sep/Oct double-diagonal will be if SPY moves past $111.60.
On a technical basis, there’s a higher-than-usual chance…
Here’s the status of our open positions after the bears came roaring back this week:
SPY August/September 109/114 Double-Calendar: Heading into the closing bell this afternoon, this position was showing an unrealized gain of about 10.6% and a base-position delta bias of about +36.4. Our vega has grown to more than 30 (per base-position unit), and that’s been enormously helpful in the sell-off.
This is what our core newsletter risk profile looked like a few minutes…
This “adjustment” is actually a partial unwinding of our delta-negative position in this trade. One thesis of our strategy is mean reversion, and a retest of SPX 1080 is more than likely; however, we have a time limit with options, and our primary concern is risk-management. It hurts to lock in a loss, but the pain is worthwhile considering the reduction in delta bias that we’re achieving with this trade and the bigger picture of long-term profitability.
We’re putting in…