There’s quite a few people on Twitter (X) who are generous with their time and knowledge and Cem Karsan is certainly one of those people. The fact that his tweets (posts) are often cryptic and highlighted by emojis require readers to spend a little time understanding what he is actually saying. In the tweet below he offers a bit of his knowledge in the most obvious way possible. Cem has been bullish since the end of November based on his analysis of flows (option dealers and others) and he thinks those positive flows are likely to continue until around Jan MOPEX (Jan19). He originally thought SPX could see highs to 4850-75 but has since dialed down his estimate.
And then there is Dr. Gingerballs 😄 with his analysis. See his tweets below.
It appears that his estimate of a grind higher could/should target SPX 4700-50 by Jan19 expiry. Now, whether you choose to trade options on those estimates is up to you. Below I’ll show you a strategy that I would consider using to target that area. Nothing in this blog or in my Twitter feed is investment advice so you need to consider whether or not a strategy like this is appropriate for your portfolio!
Below is the risk profile of a directional Call Condor. The prices of all options shown in this post were from the close on Friday, 12/8. The maximum profit target area is, unsurprisingly, located between SPX 4700-50. The Delta of the position is just 6.22 so there isn’t much directional risk/reward over the next week or so. The Delta will increase over time so if SPX trades lower or stalls here for a week or two then this becomes an even more directional position. The Theta kicks-in as SPX rises in price and time moves on.
What if I want more directional risk? Based on Cem’s and Dr. Gingerballs’ 😄 analysis it seems likely that the 🎅 rally and new year flows should take SPX higher. With one adjustment I could triple the Delta exposure to benefit from a rally in SPX now instead of over time by converting the position into an Unbalanced Call Condor. Perhaps I might add those 2 extra Call Vertical Debit spreads on a pullback into a rising 8-day SMA lower band or a pullback into Fib support. What if I wanted to do just the opposite for a trade? Even if I’m bullish, if price has a strong move up I might want to reduce that Delta exposure for a short time anticipating a pullback.
Below is also an Unbalanced Call Condor but this one is unbalanced on the credit side of the position. Here I’m simulating selling an extra 2 OTM Call Vertical spreads to reduce downside risk and to turn the Delta to -3.25. Over time, that Delta will increase and turn positive again since the position is still a bullish position! This position would actually profit from a short term move lower in SPX and so can be a good hedge if I want to hold the position while expecting a pullback. Because the position is unbalanced on the credit side there would be a $5,000 margin requirement.
There are many ways to tweak this position including changing the quantity of Debit or Credit spreads that are imbedded in the position or selling OTM Put Vertical spreads which would add downside risk but increase the profitability of upside or sideways price action. If any adjustments are limited to no more than one of the same trades per day then even traders who are limited under the Pattern Day Trader rules could manage this position. Since the position can be managed by adding or reducing size on either side of the position it’s easy to not open and close the same trade on the same day. Closing a Debit spread has a similar effect to opening a Credit spread although the effect on Delta and margin requirement would vary considerably.
I’ve added one more risk profile for you to consider. It’s not that I think it’s better or worse than the previous structures, it’s just another alternative. Below is an Unbalanced Broken Wing Condor. The Delta is slightly higher and the profit area is wider but the maximum profit is less. You have to sacrifice something to get a wider profit area, right? There are no free lunches in trading!
Simulate different quantities of Debit and Credit spreads as part of an Unbalanced Condor to see how that effects the position’s Greeks and margin requirement. Consider breaking the wings on the Condor (as shown above) and see what that risk profile looks like. I know it sounds painful but it’s really not that bad! For traders who can’t afford to trade SPX due to it’s size then XSP is a potential alternative.
Tuesday, 12/12 Update: If someone had initiated the most bullish version of the directional Call Condor last Friday (12/8) with an initial cost of $4,135 and, just prior to today’s close, had sold a 2-lot of the Jan19 SPX 4750/4775 Call Credit spread for $7.05 (the price at today’s close), their net cost on the position would drop to $2,725. In addition, the $13,365 maximum potential profit would rise to $14,775. A higher potential profit with a lower cost! This would be a good example of trading around a base position with the goal of reducing net cost and or increasing potential profit.
Questions/comments? Leave them down below!
A thorough and clear explanation of applying and managing a call condor. I often ponder how to best set myself up to benefit from future price targets. Could you add whether or not call diagonals would be an appropriate strategy for the presented market hypothesis? If they are less favorable in this low VIX environment, at what point would you consider them? Thanks!
The forecast for volatility is potentially a mixed one into mid-January if Cem’s thesis pans out. While the VIX could continue to decline, there’s a potential that fixed strike vol increases which would support a Diagonal strategy. The ‘safer’ play is a Condor or Butterfly since vol has no bearing on it’s final price at expiry. Again, IF the thesis of higher into mid-Jan followed by an unpinning of vol is correct, that means that Diagonals (or any long Vega trades) will the best strategy after mid-Jan.