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Choosing an Appropriate Kite Spread


There are two possibilities regarding strike prices.


Minyan Jeff writes:

I assume the credit spreads that make up the initial iron condor that you're 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?

The question above refers to this introductory post on the kite spread.

Yes, the kite is intended to protect credit spreads that are farther out of the money.

When choosing strike prices for the kite spread, there are two possibilities.

1. The Iron condor options are no longer far OTM and there's not much choice. The kite is more expensive when the option you buy (the kite string) is only a strike or two out of the money.

Examples: You're short the 890/900 call spread.

If the underlying is 840 to 850, and if you want a kite position whose strike prices don't overlap those of the iron condor (recommended), your choices are limited. The only kite spread that fits is buying the 850C and selling the 870/880 call spread.

2. When the IC options are farther OTM, you have more choices. If the underlying is 820, then your choice depends 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, when all you want is protection (higher strike prices, less costly), there's flexibility.

i. Profit opportunity: Buy 830 call and sell three 850/860 spreads or four 860/870 spreads.

ii. Intermediate: Buy 840 call and sell three 860/870 spreads.

iii. Protection: All you need to protect the iron condor is buying 850 call and selling three 870/880 spreads. This is the same kite as you'd buy if waiting for the underlying to rise before owning insurance. But it's significantly less expensive to buy it now, when the 850 call is 20 to 30 points farther OTM.

The kite spread is a flexible strategy, and is a topic I plan to discuss more frequently.

No positions in stocks mentioned.

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