The Kite Spread

As I've discussed in recent blogs, I've been using a three-legged spread to provide protection for my iron condor portfolio.  No one has suggested a name for this type of trade, so I've decided to refer to it as a kite spread.

Example 1: The C3 Kite

Buy 1 XXX Mar 300 call

Sell 3 XXX Mar 320  call

Buy 3 XXX Mar 330 call

This is a call spread, so it's has the designation 'C'

The ratio is 1 x 3, and has the designation '3'

Example 2: The P4 Kite

Buy 1 ZZZ Jul 420 put

Sell 4 ZZZ Jul 390 puts

Buy 4 ZZZ Jul 380 puts

These are puts and the ratio is 1: 4.  Thus, it's a P4 Kite.

Constructing the kite. 

  • Decide whether you are buying call or put protection
  • Select strike price of option you want to buy

  • Choose the spread to sell
  • Decide how many spreads to sell

The number of spreads sold is determined so that the single long option is worth as much (or more) than the spreads are worth at their maximum value.  In other words, if you sell four 10-point spreads, they can be worth $4,000.  Thus the option bought is 40 points closer to the money than the long leg (the wing) of the spread.

In example 1 above, the 330 call is 30 points higher than the 300 call and the you sell three spreads (yes, you can always choose to sell fewer).

In example 2, the 420 put is 40 points from the 380s, and you can sell up to four spreads for each 420 put purchased.


I think of the kite spread as a long option (call or put) that grows in value as the market moves.  At the end of the kite there's a weight (the sold spreads) that can temporarily make it difficult for the kite to soar.  But, if we catch a good wind, the kite can become more and more profitable.



9 Responses to The Kite Spread

  1. ricardo 11/12/2009 at 7:22 AM #

    Mark, could you post a profit/loss graph an example with an IC. Thanks

  2. Mark Wolfinger 11/12/2009 at 8:28 AM #

    Working on it. I’ll post later

  3. Stevenplace 11/19/2009 at 11:06 AM #

    That ZZZ stock seems an awful lot like BIDU

  4. Mark Wolfinger 11/19/2009 at 11:20 AM #

    Hi Steven,
    Coincidence. I don’t pay any attention to BIDU.

  5. ngbstl 11/19/2009 at 6:40 PM #

    So from what I can tell, you would do this to implement a “bullish/bearish within limits” strategy? To use put example, you have a bearish bias, but you have expectations on the limits of the bearish move (i.e. strong support level, etc). So you’re effectively using the spread premium collected to pay for your long leg, so you’re making the bearish bet “for free”. However, as both put and call versions are short vega, it seems the vega element is advantageous only on a call “kite”: falling IV will help the call/bull version but hurt the bear/put version. So the bull/call version could be more easily exited early for profit, while you would need the bear/put version to settle in the sweet spot near expiration. Do I understand this right?

  6. Mark Wolfinger 11/19/2009 at 8:37 PM #

    1) I recommend implementing this srategy ONLY to provide protection for a position that loses money on a big market move. These include credit spreads, iron condors, covered calls or naked short puts.
    I want to own an extra put or call – at a reasonable price (far from free). Obviousy that extra option works very well on a big move – and that’s when it’s most needed.
    I would not make this trade as a stand alone play. That’s just me and my style. I do not buy options in an attempt to earn a profit. I only buy options as insurance against loss.
    I earn my money by selling options (never naked) and buying insurance. The kite is merely one method of owning insurance.
    2) There is nothing wrong with using the kite as a directional play. But as a non-directional trader, and as a non-option buyer, I don’t want to suggest that this is better than alternatives.
    3) I think you understand this correctly, but when IV increases sufficiently on a decline, it’s easier to exit than you may imagine.
    When the spreads become at the money, they will trade in the $5 range, regardless of IV (over a reasonable range) – but the extra put will already be nicely ITM, and have a pumped IV. To me, that suggests an exit that’s not too difficult. But I have not tried to exit.
    If underlying declines farther, high IV keeps the spreads from increasing in value quickly, but long put grows quickly. Even better to exit.
    BUT – and this i the big negative – if expiration is nigh, the credit spreads can quickly approach maxiumum value while the long option has ben hurt by time decay.
    I noticed that these spreads always are profitabe in the initial stages of a move (puts or calls). But I do not close because I need the proetion. I may sell out the long leg and buy another, one strike away, to take cash out of the position.

  7. Jeff Smith 12/03/2009 at 11:06 AM #

    Mark, I assume that the credit spreads that make up the initial iron condor that you are protecting are further OTM than the strikes used in the kite,true? How much further OTM are the IC spreads in the above kite examples? Thanks.

  8. Mark Wolfinger 12/03/2009 at 12:03 PM #

    When choosing strikes, there are two possibilities.
    a) the IC options are not that far OTM and there is not much choice. This kite is going to cost more cash.
    b) the IC options are far OTM, and you may choose from among many strikes.
    You are short the 890/900 call spread.
    a) If the underlying is 840 to 850, and if you want (preferred) a kite position without overlapping strike prices, you are forced to buy the 850C and sell the 870/880 call spread.
    b) if the underlying is 820, then you have a choice that will depend on your goal. You can choose a kite with a good chance to earn a profit on a rally (lower strike prices, but more costly), or you just want protection (higher strike prices, less costly).
    i) Buy 830 sell three 850/860 spreads or four 860/870 spreads.
    ii) you can do a similar trade by buying the 840
    iii) or you can get protection at a lower price by buying one 850 C and selling three 870/880 spreads. Same choice as in a) above, but being 30 point farther OTM than before, the price is less.
    Flexible strategy.
    Because this post is almost one month old, and I believe it’s important for more people to see this, I’ll repost it soon.

  9. Matt Kalal 12/27/2014 at 11:42 AM #


    My question has to do with the number of spreads you sell (examples are for SPX) The price of the 2100 call is $33.60. If I make this a C4 kite by selling four 2130/2140 call spreads, the price of each spread is $3.70, and the total price of the kite is $1880.

    Would you ever sell 9 call spreads, to get the price of that kite spread down to $30? It still provides some upside protection against a big move, although with a larger “weight.”

    What I’m struggling with is what size of upside credit you’re protecting at such a high price; if I’m trying to protect three 10-point call spreads for $250 credit, neither of the options above seems appropriate. Either the kite is too pricey, or the “weight” is too big to manage.

    Any thoughts/challenges you’ve got would be appreciated. Thank you for your work here, and Happy New Year!


    The simple answer is NO. I would not consider selling 9 spreads when using the kite spread as an adjustment. The major reason: When making a risk-reducing adjustment I found that increasing overall risk is a losing strategy. Yes, it looks great to raise the break-even point for the trade to a higher strike price — but because the maximum loss would become much greater that it was for the original (pre-adjustment) trade — I strongly urge you not do to that.

    Look at it this way: Would you consider that 1 x 9 spread as a brand-new position? If you (Matt) would like to own and manage that position, then yes – you could consider it as an adjustment. But most traders would not like to make that trade.

    I know that no one likes to invest more cash when adjusting – but it is sometimes necessary. Please take it from me (someone who had to learn the hard way) that making an adjustment for the minimum amount of cash possible feels good – but it will cost money over the longer term. When a position is not working, it is acceptable to cut both risk and reward and if you end up with a tiny profit — that’s not so bad for a trade that had been in trouble.

    Point Two. I agree that you do not really want to invest $1800 to “protect” a trade for which the maximum profit was $750 because (in your example) that would make the downside a losing proposition and there is no reason to take big downside risk when guarding against an upside move. For that reason, I have found that the kite spread is not as effective as I had hoped it would be. But – the big point to remember is that wan IV is relatively low, the like spread costs a lot more than when IV is high. Thus the kite is not a universal solution and can only be used sparingly: When IV is high and when the cost is not too high.

    Buying an $1,880 kite to protect three 10-point spreads costs too much. For a three-lot, the one-lot kite is not a good choice. It would be much better (most of the time) to simply cover one-lot of the 3-lot spread to reduce risk. I know it feels like giving up on the trade, but that has to be ok. Better to give up than to trow good money after bad.