Condor Options

Robust May sales reports from discount chains Wal-Mart, Costco and BJ’s sent RTH rocketing higher this morning, despite negative numbers from Target and most of the major department stores and apparel retailers. The ETF is now trading above the theoretical break-even for our adjusted June/July double-calendar (the upper break-even has fallen below $98 due to declining implied volatility).

Although it’s currently more than $0.50 off its intraday high of $99.10, it looks like RTH will close above the intermediate-term downtrend resistance line. We think there’s more risk to the up side at this point, so even though this is going to require more cash, we’re going to unwind the May 21st adjustment, as follows:

-1 RTH July 90 put
+1 RTH June 90 put
for a net credit of $0.60.

+1 RTH July 100 call
-1 RTH June 100 call
for a net debit of $1.35.

This puts us back where we started, with a 95/100 double-calendar. We’ve had to book some losses and add 22% more capital to our position, but sometimes that’s the price we have to pay for sound risk management. After both adjustments, the position now has a 47% chance of being profitable at expiration, with break-evens at $94.25 and $100.90. We’ve cut our delta back to neutral.

Don’t forget that the number of contracts above represents half of our original position. Because we bought the spread at 90 as part of an adjustment, we’re selling our entire position at the 90 strike and buying an equal number of contracts at 100. This gives us an equal number of contracts in each of the original spreads, at 95 and 100.