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Kite Spread: Protection for Credit Spreads


In "Rookies" you have a chapter on insurance. You suggest using a
front month long put to cover 2nd or 3rd month put credit spreads. The
Kite appears to be using the same month long put along with the credit
spread. I don't see how the credit spreads can pay for the long put
using the 4×1 ratio? What am I missing?




You are not missing anything.

1) I do believe owning front month insurance is more effective than owning same month insurance – except when IV is low and you want to be long vega.

2) It is still uncomfortable for many traders to own options that expire before positions they are supposed to be protecting.  The kite overcomes that problem.

3) The credit spreads DO NOT pay for the long option in the kite spread. 

The idea is to sell the credit spreads to enable the investor to purchase an option with a very useful strike price – at a reduced cost.

4) One drawback for kites – I have not yet discussed it (but it's all in the eBook that I'm writing) – is that they are not designed to be held through expiration.

For traders who prefer to own iron condors to the bitter (or not so bitter) end, kites are not the best adjustment vehicle.

But for those who plan to exit early (two to four weeks early), this is an ideal insurance policy.

I'll post more on kites, but have no specific schedule.


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