MarketNeutralOptions.com

16 Aug 2007

SPY (Standard & Poors Dep Rec) Iron Condor initiated on 20 Jul 2007

Trade Summary

For a net price of $2.00 Debit or better.
Profit or Loss: -$110 per position.

Trade Analysis

Where is the bottom? I guess this must be the question burning in many traders’ head today. I guess I was too optimistic to suggest that we may have a small chance of closing this trade for less than the maximum loss. It really does sound a bit silly today. It will really take a miracle for that to be possible now I think.

I guess it’s time to cut off this rotting trade and move on. I was reading the analysis for this trade (below) earlier when I realised that this trade is only 27 days old. SPY was trading at around 153 about 3 weeks ago and now it’s trading at 138.23! That is a cool 14.77 SPY points, which translate to about 147 SPX points.

Let us spend some time to walk through this trade to see if there is anything to learn from. The SPY turned really bearish only on 27 Jul. On 26 Jul, it would seem that the support would hold since this same support had stopped two previous bearish attempts. There was no need to close this trade on 27 Jul because we were only 1 week into the trade. To close it then would lock in losses and we’ll end up kicking ourselves if SPY bounced up like what it had done before.

SPY then chopped around for a while trying to find a bottom. It went passed it 200-day MA (purple line) on 5 Aug but bounced back above it the next day. Should it not bounce on the 6 Aug and stay below the 200-day MA, we might have closed the position because the longer it stays below the 200-day MA, the stronger it will become a resistance on the way up. Lo and behold, it bounced and in fact, for the next two days, bounced all the way above its 100-day MA (yellow line). So it had found a bottom we thought.

On hindsight, we should have closed on the 8 Aug for a small profit. If you were to look at the chart and take away the last 6 candles, would you think that it will freefall so much the next week? On hindsight, everything is 20/20. We took a bet but we were wrong. We expected the old support of 148 would act as support once more. We expected the 100-day MA, which was resistance only a day ago to become support. All our technical analysis were proven useless as nothing turned out as expected.

Worse, it kept falling. Until today. We have no chance to turn back. We were thinking of rolling down the put spread at some point in time. Fortunately we didn’t. If we did, we’ll have lost more than $110 per position since whatever we rolled to should be ITM today.

The risk is high for this kind of condor but so is its reward. We were risking $110 to make $90 with very good odds. But we were wrong. Somehow I feel that we are not the only losers for this month, if that somehow makes all of us feel any better.

There will be no charge for this trade since it’s a loser.

Best regards,

Gary

***********Trade History**********

15 Aug 2007

Trade Update

This trade is the worst trade we have on for this month. It looks like we are going to suffer a maximum loss for this one. Because this was a 1:1 risk/reward condor, we normally try to wait for a favorable time to exit. However, there is no such favorable time for this one. We can close it today and suffer the maximum loss of $1 per position or we can wait for one more day and if nothing in our favor happens, we still suffer a maximum $1 loss. Since we are facing a maximum loss of $1 if we close it today, I say we should take our chance and wait out for another day or two. SPY’s last trading day is on option expiration Friday. If the market decided that it has enough of selling tomorrow and IV were to dive, we may have a small chance of reducing our loss.

In short, close now and face maximum loss. Wait out for a while more, we may have a chance to reduce the loss.

Gary

************Trade History***********

20 Jul 2007

SPY (Standard & Poors Dep Rec) Iron Condor initiated on 20 Jul 2007

Trade Summary

For a net price of $0.90 Credit or better.
Total margin required: $110.

Trade Analysis

This is our first 1:1 iron condor in a while. We aren’t really risking $1 for $1, to be exact, we are risking $110 for $90 but that is as close to 1:1 risk reward as we can get with only 27 days to expiration. For the newer subscribers who may not fully understand the difference between a 1:1 iron condor and less than 1:1 iron condor, you can read more about them here: http://marketneutraloptions.com/blog/2007/04/12/do-you-use-any-stop-loss-for-your-iron-condors/.

The reason why this is our first 1:1 iron condor trade in a while is the fact that the market is not only more volatile in recent months but also tends to make big moves in either directions. We have been seeing more and more long candles in the daily chart, both white and red. All it takes is 2 long candles (white or red) and our condor will be killed. The only reason we initiated this trade is that we believe this trade has a decent chance of making some money. With only 27 days left, time value will erode away very quickly in the next few weeks. Furthermore, today’s spike in IV will inflate the value of this trade. When the IV subside, the value of this condor will waste away even faster.

When we initiated this trade, we have a probability of more than 50% that this condor will make money. Our breakeven points are at 148.10 on the downside and 157.90 on the upside. That gives us a profitable range of about 9.8 SPY points, which is about 98 SPX points. As long as the SPX moves in between these 98 points for the next 27 days, this trade is a winner. It has a slightly negative delta of 5.63, which is a rather low figure at the moment. Delta is the number we set our eyes on everyday because it tells us our risk at that instance. Simply put, we don’t want to see a large number for delta, positive or negative.

We also see a strong resistance at the 155 level and therefore, setting our short call at 157 should give us sufficient space to adjust. For support, we have 20, 50, 100 MA waiting to catch a free falling SPY. There is a good chance that SPY will trade in a range for the next few weeks. However, with earning season now in full swing, we can expect more long candles ahead.

We will try not to adjust this condor for as long as we can since this is a 1:1 risk reward condor. However, if we sense that things are not looking too good, we may just close it prematurely for a small gain or loss.

Gary

Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com

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