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The Kite Spread: Coming to the Rescue

I haven't written about the kite spread in awhile, but I made some trades on Monday March 1, that are worth mentioning.

Here's the situation:

1) Much earlier I bought 4 Apr 630 C3 kites.  That means:

Bought 4 RUT Apr 630 calls

Sold 12 RUT Apr 650/660 call spreads

2) That position profits on rallies, but the iron condor portion of my portfolio could look better (i.e., I'd like the risk graph to show less loss in the 670-680 range)

3) By owning the kite spread, I was able to buy upside protection at essentially no cost.

Trade ONE

Sell 4 RUT 630/640 C spreads.  Collect $610 each

This trade brings in cash and makes the upside a bit worse.  I know the objective is to make the upside better, but when selling this spread and collecting more than $600, the potential upside that I sacrifice is less than $400 per spread. 

Because I still own 4 naked long calls (now the Apr 640s instead of the 630s), that provides decent upside potential.  When I complete the trades below, the upside will look even better.

I used the >$2,400 cash to buy 4 more kite spreads, paying just over $610 each [Thus, the spread cost a small debit]


Trade TWO

Buy 4 RUT Apr 650 C3 Kite spreads.  Specifically,

Buy 4 RUT Apr 650 calls (to close)

Sell 12 RUT Apr 670/680C spreads


Typically, it costs a significant debit to buy the protection afforded by the kite spread, but once you have that protection in place, it can used to make suitable position adjustments.

In this example, I rolled part of the original kite spread to higher strike prices, gained upside protection, and paid almost nothing.

Before

Orig_kite

After

After_trade

The graphs may look similar, but a glance at the numbers on the y axis (left) shows that the upside is much better with the added kites.

This graphs were made after the market closed, At that time the cost of the four kites spreads would have been higher.  That's the reason the 'after' graph shows a larger loss – on a big decline.

630


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