This is an Iron Condor trade. After getting burned a little last week on the whipsaw motion of the market, I'm going to dip my toe back in with this trade. It is pretty neutral in nature but offers a reasonable amount of room to move.
||Sell SPY 109/107/100/98 iron condor||ROI
||1. Exit if I can lock in
60% of my
initial credit (i.e. $.50)
2. Exit if I can lock close either side for $.25
3. Exit if within 4-7 days of expiration
This is a pretty interesting trade. As usual, it has $2 wide spreads on each side, which means my total risk in the trade is only $.75.
An iron condor may seem like an odd selection in this market. However, due to the higher volatility, I got a pretty decent price on the spread. This means I am willing to be more tolerant of any wild swings. I personally feel the greatest risk may be to the up side. In fact, in retrospect, I almost wish I'd have given up some change to maybe get a higher short call spread.
I continue to like trading the SPY because it offers good liquidity and great fill prices. As the chart above shows, there may be continued selling and it wouldn't surprise me to see SPY pull back completely to the 61.8% fibonacci level before resuming the move up. However, the bounce could happen at any time.
When selecting the options I was going to sell, I went right to the December options because there just isn't much time left in November.
I also went right to an option strike price that had about 35% probability of expiring, leaving a 65% probability of success. That might have been a little aggressive but it is within my acceptable range for a choice of short strike.
I actually made a slight mistake in my annotation, which I can't change now. I noticed that as I was setting up the trade and capturing the screens, SPY sold off a little bit casing the $107 call to drop in probability and $100 put raise in probability. As a result, I ended up circling the wrong strike on the image above.
I should also note that the probability of success for this iron condor is lower than I typically typically take, which is why the trade pays so much. However, take a look at the chart above. What this indicates is that there is still about a 64% probability that SPY will be between the break even points of $98.74 and $108.25 on expiration.
By choosing a different exit strategy, I can also increase my probability. More on this later.
I've already mentioned that I received $1.25 credit, which means I only have a total risk of $.75 per contract. I continue to use the strategy of risking just 2% of my portfolio, which remains roughly around $20,000. So, $400/75 = about 5 contracts.
Setting up a limit order means I get in at my desired price. I ended up getting a fill at $1.25.
I mentioned that my exit plan will alter my probability of success. That's because I don't intend to hold this trade until expiration. With this kind of iron condor trade, I prefer not to hold as long and I'm really only looking to extract about 60% of the initial credit from this trade. That means if I can lock in $.75 (closing for $.50 debit), I'll be out. I also can adapt this by exiting each side for roughly 1/2 that $.50 debit.
In summary, I will exit under the following conditions.
Other trade management for me includes monitoring the levels relative to support and resistance. There is some resistance at right around $107. A break above that level would indicate a high likelihood of moving higher so it may be an indicator to close early.
There is also a support level at around $102. A break below that level could mean a lot of selling - and another possible indicator to close early.
I've started including an analysis of the impact to my portfolio of adding this trade. While each trade roughly stands on its own, it also contributes to my overall portfolio and it's a good idea to make sure I'm aware of where I stand in that regard.
This iron condor added just a little more negative delta to the position. Part of that has to do with the fact that SPY began to rally after the trade got put on. That's OK, because I am slightly more bearish still - even though there appears to be a bit of a bounce finally.
I suspect there will be a lot of turmoil and churn over the next month or two.
Once again, the strong move up has allowed me to close the put side of an iron condor. This is a bit of a mixed blessing as SPY may continue to power through the upper strikes.
Early in the day, my order to close the put side of this trade filled and I'm out for a debit of $.20. I received $1.25 credit on the trade but paid back $.20 to close the put spread leaving a net credit of $1.05. The call spread still remains on so my risk in the trade is now $.95.
The other impact of closing the put side of this iron condor is that it is no longer a neutral trade. With just the call spread on, this trade (and my overall portfolio) has become rather bearish. By that, I mean that the delta is negative and means that my portfolio would benefit from a sell off.
With the trade this far out, I also have a number of potential adjustments available to me.
Perhaps I'll demonstrate make an adjustment using one of these strategies and post another update this week.
I have been monitoring this position for the last few days looking for a possible adjustment. The current state is that the call spread portion of this iron condor has been badly run over. The short call is at $107 with SPY currently trading at $111.
Now, on the surface, that looks pretty bad. However, the risk in the trade currently stands at $.95 (times 5 contracts).
I've looked at the potential adjustments I mentioned last week and most of them just don't make sense in that they don't help that much and/or they add too much risk for the benefit they offer.
Frankly, the one action that is beginning to make sense is to simply close the position. Today, I could buy back the call vertical spread for $1.45 debit. Since I took in $1.25 credit, paid $.20 to close the put spread and would have to pay $1.45 to close the call spread, I'd be losing about $.40 total. That's a lot better than the alternative.
If SPY keeps moving up, I could also sell a call spread higher up to make up for some of the loss of this trade. However, I need to be careful, that any new trade I execute is put on for sound reasons and not to just "get some of my money back".
Ok, the last few days left me thinking maybe we'd see SPY fall below the short strike on the is call vertical spread, which is the remainder of the iron condor I put on.
At this point, the market is just looking too bullish to see this trade recover. I decided that rather than remain of two minds (stay in or get out), I'll do both. I closed three contracts of this position for a debit of $1.65. What this means is that I currently stand with a potential measly $30 profit if the SPY does sell off and the short strike is no longer overrun.
However, I may still close the remainder of the trade for a loss if I can get a chance to get out. I noticed my portfolio is still skewed toward the bearish side. That means continued bullish movement puts a strain on my account. A am therefore putting on some adjustments overall to reduce the negative delta. Look for these in another trade of the week.
I finally closed the remaining call spreads. I had really hoped that the SPY would sell off enough to close the remainder of this position. However, that just didn't work out. So, let's take a look at the result of the trade.
I put the trade on for a $1.25 credit. I paid $.20 to close the position leaving a net credit at that point of $1.05. With 5 contracts, that would be $525. I then closed 3 contracts for $1.65 or $495. I closed the remaining two contracts today for $1.94 debit or $388. That makes a total of $883 to close the position, less the remaining credit of $525 leaves a loss of $358 or about $.71 per contract.
That means I experienced about 95% loss on my initial risk of $.75 per contract.
I hate it when a trade loses money but I can live with it. Why? Because I kept my trade size manageable and I did everything I could.
Are there any lessons to learn?
One of the things I've been recognizing is that I continue to not believe strongly in this rally so I've been trying to keep my portfolio neutral to slightly bearish overall. However, the trend is the trend... is the trend. This isn't the first time the call side of an iron condor has been run over.
I have a hard time believing the market can continue moving up given the fact that not much has changed in the health of the economy but as the saying goes... 'the market can stay irrational longer than you can stay solvent'. The key is to keep trades manageable and learn the lessons.
My lesson: I'm trying to take more bullish trades until I see indications to the contrary.
Rule # 1 - Don't lose money.
Rule # 2 - Never forget Rule #1 (Warren Buffet)
Stay tuned for further updates as the trade progresses...