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Kite vs. Call (or Put). Part II

In Part I, the discussion centered on two strategies and how they compared when used to insure the value of a portfolio against losses resulting from being short credit spreads (that includes iron condors).

The two strategies are the kite spread and the long call.

The discussion continues by examining how each of these negative theta positions holds up as time passes.

Figure 1 shows the P/L graph when the position is opened. There are 60 days remaining before expiration.

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Figure 1 (repeated for convenience)

Figure 2 shows the same position 30 days later. It may be difficult to read the numbers on the graph, but the software used to draw the plots tells me that the kite spread lost $520 over those 30 days. The call option declined in value by $708.

After 30 days, the kite has lost less value.

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Figure 2


Figure 3 illustrates the position after another 20 days have passed. Expiration arrives in 10 days. I usually recommend exiting near-term positions by this time, but it's important to follow these strategies for investors who prefer to hold positions longer (and that's most traders).

At this point in time, with SPX still trading at 1100, the kite has lost a total of $921 and the call is worth $1,031 less than our cost. The kite has lost less value, but the gap is narrowing.


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Figure 3


One of the tenets of options trading is that when you buy options, the clock is ticking and it's a good idea to sell those options quickly (after whatever it was that you hoped would happen, happened). But this time we are buying options as insurance. As long as you hold the position being insured, it's important to hold the insurance. [That insurance can be modified to lock in some cash, but that's another (long) story] That's why this time decay study is important.

This is only one example of the kite spread in action, but it seems safe to conclude that it decays more slowly than the call.

To me, the kite has an edge. It does have higher commissions, but so far, I find trade executions for the three-legged kite spread to be excellent.

If a super larger move does not occur, you are going to be better off holding the kite as an adjustment than you are when holding a call (or put or strangle).

This is just one aspect of the kite story, and I find it to be a useful strategy – and worthy of more study.  

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