I put this iron condor trade on first thing this morning. I've become a bit more bullish but am not convinced the market will power much higher before pulling back.
||SPY Sept Iron
||1. Exit if I can lock in
60% of my
initial credit (i.e. close for $.37)
2. Exit 4-7 days prior to expiration
3. Exit individual sides if I can close for $.20 debit
This is a $2 wide spread on each side with $9 between the short call and the short put. That's a fairly wide zone of profit given the current volatility.
I have slowly become more bullish in the medium term, although I still think there is a healthy retracement due. With the large bullish move that has taken place over the last month, I suspect that the market will probably want to pause in the area for a while. With a near term neutral perspective, the Iron Condor is a nice trade to put on as it can produce positive time decay with very little market bias while the market goes nowhere.
As usual, I am taking a trade on an index ETF. In this case, I'm using the SPY, which tracks the S&P 500. I like this index because it represents a fairly broad segment of the market.
I've mentioned in my iron condor strategy page that there are several ways to select strike prices. I have been putting these trades on using a more aggressive strategy, picking short strikes for both the put and call that have a probability of expiring (one penny or more in the money) in the range of 30-40%.
As this picture shows, I've slightly skewed this trade to the up side (in terms of probabilities). My short put is around 30% probability of expiring while my short call is just over 26%. I could have chosen the 104 call as my short strike to make it a more balanced in terms of probabilities, but notice that I'm actually closer to the short call. The underlying is trading at $100.83 (almost $101). That means it's $4.80 from the short put to the current price and about $4.20 to the short call.
The reality is that many times it is difficult to get an exact balance between the upper and lower sides. I just have to do the best I can.
Prior to entering, I did a quick analysis using the thinkorswim analyze tab.
Here, the analyze tab shows that with the current strike prices, I have a probability of success of 45.7% (defined as closing between the two break even points on expiration). That's pretty good for a trade like this and if I exit early, this probability actually goes up.
The nice thing about the iron condor spread strategy is that I know exactly what I can make and exactly what I could lose. In this case, I can get a credit of $.93 on a $2 wide spread on each side. That means my total risk in the trade is only $1.07. Remember that on this kind of trade, there is a chance that the options could expire with SPY all the way through the upper strikes or all the way through the lower strikes but both couldn't happen. In that case, I only need to count one side of the spread as my total risk.
With a portfolio of about $20,000 and risking 2% per trade, I can risk $400 on the trade. With a total risk of $1.07 (or $107 per contract) I can take 3 contracts with a fraction left over. I always round down, not up.
Here's my iron condor order set up. I actually bumped the price up to $.93 just
before submitting and got filled almost immediately.
Before I go into my exit rules, I want to review some of my assumptions regarding this trade. I sized this position based on the assumption that I could face the maximum loss on the trade (as I often do for my iron condor trades). While the call and put spreads are each $2 wide, I am taking in a credit of $.93 and leaving a final risk of $1.07 or $321 for the 3 contracts. I am willing to sustain this loss if necessary, which means I don't need an exit rule based on worst case scenario.
My exit plan then is to exit when one of several things occur.
Right now, my iron condor trade from last month isn't doing too well on the call side. Let's see how this one fares.
I had intended to get this update out earlier this morning before the market opened but was dealing with internet issues. Had I done so, the update may have looked a little different. At one point yesterday, I was within pennies of closing the call side of this iron condor spread. However, today, the SPY has headed more toward the middle of the spread again.
Will we go up? Will we go down? I don't know but already, the trade has gained from time erosion. I put the is iron condor spread on for a $.93 credit and I could close it today for $.79. Being just a week into the trade, there isn't really much to do. I did put an order in to close the call side if I can do so for a $.20 debit (my exit rule #3).
Thinking defensively, I could ask myself what I might do if the selloff to the downside continues. What strategies might help me hedge some risk without imposing too much risk in the opposite direction?
At this point, I don't know that I'll do anything, but in situations like this, it's always good to have some ideas ahead of time instead of waiting until the point of panic when one side or the other of my spread is getting run over.
Remember too, I've already sized the position for a max loss of $1.07. Anything I do to mitigate the existing risk in a directional way will potentially add risk in the opposite direction.
Wow! A week ago, I was planning strategies to hedge the downside. Yesterday, I hit my trigger to close the put spread for $.20. So now, I'm left with just a 107/105 call spread (and lots of negative delta).
There's still a lot of time left in this iron condor spread (or what's left of it) so there's not much else to do but wait for more time to pass. In the mean time, since I talked last time about downside hedging or adjustment strategies, I thought I'd cover some possible upside hedging strategies. What are some ways I could make adjustments to this position, especially now since I closed the put side?
I'm going to wait to see if this move up continues, but I kind of like option #4. The key thing to remember is that any time I make an adjustment, I'm really just shifting my risk around.
Well, it's a good thing I closed my put spread last week. Now we finally have a pullback forming that has allowed me to exit the call spread and be completely out of this trade. I closed the call spread this morning for $.20 leaving my net profit in the trade $.53.
With the trade closed, let's take a look at the statistics. My original target ROI would have been 86% if I had let both sides expire worthless. However, my exit plan for this iron condor strategy is to exit when I can capture 60% of the credit. With an initial credit of $.93, that would be $.55. In this trade, I had a fixed exit rule of closing each of the spreads at $.20 so my actual net credit is just slightly less than that.
My actual ROI is 49.5%. I arrive at that number by dividing my actual credit by the initial risk amount of $1.07. Remember, even though I close early, my actual amount risked (or amount held in margin) is still $1.07.
Could I have done anything different in this trade? Since I only took a few contracts in this trade, the few pennies I gave up from my target 60% exit probably aren't that significant. However, it is worth considering that instead of using a fixed amount of $.20 per side to close the individual spreads, maybe I should go with 20% per side. That would get me the 60% net profit regardless of my initial credit.