Hi guys, I wanted to get some of your thoughts on what strategies to use when hedging risk in an iron condor position. Specifically, I wanted to get some thoughts on reducing delta and vega risk. Right now I have a May SPY Iron Condor (111/112 puts and 125/126 calls) and of course my negative delta is becoming greater as the market is melting up. What would be a good way to reduce this negative delta risk? Buy some SPY calls? If so, what strike price should I look at? Also, my negative vega is VERY high right now. Would buying VIX calls be a good strat to reduce volatility exposure? This is a paper trade that I did for learning purposes only. I'm a noob when it comes to options so please go easy on me
1) Please forget VIX calls. They are not what you think they are. they will not respond as you hope they will 2) Hedge with SPY options. 3) Several good choices - and truthfully, there is no 'best' choice: a) Cover some of the call spreads, locking in a loss, but reducing exposure b) Buy calls: I suggest 123s or 124s. Even 125s would be ok. DO NOT buy options with a strike above your shorts. Do not buy 126s. c) If you prefer to cut vega risk, then instead of buying May calls, you can buy Jun calls - these strikes can be a little higher. Perhaps 127s. It depends how much cash you are willing to pay. Don't go too far OTM. 4) Short vega is not as bad as it seems. Short vega tends to gain on the market upside, so neg vega is a small offset to losses from delta. Good trading Mark http://blog/mdwoptions.com
Thanks Mark! I'm also noticing that buying a calendar spread near my short call looks very attractive. It reduces my delta and vega risk quite a bit.