The Kite Spread: An example

Per Ricardo's request, here's an example of a 3CP Kite (both puts and calls), using RUT. 

The kite spread represents one method for exercising good risk management when trading iron condor (or credit spread) positions.

Here's the risk graph for a 10-lot December RUT iron condor:

2009-11-12_0838IC

Next, here's the same position, with the addition of a C3 Kite and a P3 Kite.

2009-11-12_0845_10IC_+_3_Kite

NOTES:

1) This is the graph today.  It changes as time passes and expiration approaches.

2) I could have chosen different strike prices.  These are merely illustrative.  My second choice would have been to sell more of the same strikes as in the IC and buy 550P and 620C.

3) Each kite required payment of a debit, so if all options expire worthless, profits are reduced.

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10 Responses to The Kite Spread: An example

  1. ricardo 11/12/2009 at 9:23 AM #

    Many thanks!!!! You are great !!

  2. Jon 11/12/2009 at 9:45 AM #

    Mark, this is brilliant. Thank you for your example. Good name for it, too!
    How much would you guess your profits would be reduced? Just a guess, of course. Also, would you expect to further adjust, ie. rolling if needed or would you figure you would stick with the position as is if threatened?

  3. Mark Wolfinger 11/12/2009 at 10:38 AM #

    Jon
    Thanks.
    The cost of the kite depends on which strikes you choose And that cost is the amount by which profits can be reduced.
    The kite is also a stand alone play, if you want to use it that way.
    This trade strategy is diffict use when you have very small positions. One way to overcome tht although it does inrease commssions) is to trade ETFs. Thus, 10 SPY instead of one SPX. Or 10 IWM in place of one RUT.
    But, there is also a potenial gain that was absent with the IC. And that occurs (in this exaple) in the 610 to 620 range (and 550 to 560). The problem with that ‘extra profit’ oportunity is that’s the area at which it becomes very difficult to hold the entire position.
    Yes, I do additioal adjutmnts, as needed. It’s a bit too much to describe. I’m considering writing an e-book on this topic.
    NOTE: The graph looks great, but price movements and the ticking clock play a role. Each trader should play with his/her own graphs to plan for ‘what if’ scenarios.

  4. Steve 11/12/2009 at 12:02 PM #

    It would seem the Kite 1×3 would help the most in the first couple of weeks of an IC to make sure things don’t go wrong intially.
    But assuming after a 15-20% loss on the debit incurred and depending on market conditions, you could either sell the entire 1x3x3 debit spread or just the naked long and keep the 3×3 credit position?
    And as you point out Mark, if this Kite is profitable your 10×10 spread will be in trouble, but at least you have the debit spread to lower your overall risk.
    There are many ways to go with this. Looking forward to the E book! 🙂

  5. Mark Wolfinger 11/12/2009 at 2:49 PM #

    Steve,
    Yes, many ways to go.
    One option is to unload the kite and take a profit. Of course that defeats the purpose of protecting the iron condor.
    I would never sell out the long call, unless I replced it with another long.
    This is not the proper place for lengthy discssion, but I am hoping the kite will bring some needed iron condor defense into play.
    I’ve alreasy finished the one-page introdction. Just the rest of the book to do!!

  6. Simon 11/12/2009 at 4:27 PM #

    Mark,
    Great name the ‘Kite spread’, it’s very fitting & easy to refer to with options for different ratios(3CP kite.. 4C kite.. etc)
    As Steve and yourself mentioned, there are many ways to go when deciding what to do with it & also determining what ratio to use would make for a great ebook. Look forward to it.
    Simon

  7. Tom 11/12/2009 at 9:45 PM #

    Hey Mark what software do you use for your option risk graphs?

  8. Mark Wolfinger 11/12/2009 at 9:48 PM #

    I just use what my broker offers. Interactive Brokers.
    Do you have something to suggest? Hoadley?

  9. Tom 11/13/2009 at 3:30 AM #

    I didn’t expect you to replay so quickly, thank you. I was hopping around looking around at different brokers/software for options and saw that graph and was curious.
    Right now I’m using Thinkorswim. They don’t have a monte sim to test like Hoadley. They do have a probability breakdown though.
    Personally I really enjoy their risk graphs and how easy they are to setup and add or subtract from possible positions. Have you tried TOS? Any Thoughts?
    I checked out Hoadley’s site, the software looks like it has alot of good stuff.

  10. Mark Wolfinger 11/13/2009 at 7:48 AM #

    I have not looked at TOS recently. It doesn’t feel right to open an account, not use them as a broker -just to use software.
    Still searching.