RUT (Russell 2000 Index) Iron Condor initiated on 14 Aug 2007
12 Sep 2007
RUT (Russell 2000 Index) Iron Condor initiated on 14 Aug 2007
Trade Summary
RUT at 783.32
7 days to Sep expiration.
Buy RUT Sep 860 Call
Sell RUT Sep 870 Call
Buy RUT Sep 690 Put
Sell RUT Sep 680 Put
For a net price of $0.30 Debit or better.
Profit or Loss: +$170 per position.
Percentage Profit: +21.25% [170/800 X 100%]
Trade Analysis
We decided to lock in our profit for this trade today because with 7 more days to go before Sep expiration, there is not much time value left. With only $0.30 left as time value, we feel that the 7 days of risk is simply not worth it. We can close up this trade and free up the margin to participate in other trades for higher returns. Also, we were concerned that IV may return and push up the price of this condor again soon. So after weighing the options we have, we decided that closing this trade is a wise thing to do.
This trade works out according to plan. We risked $800 to make $170. This is a 21.25% return on investment for about 30 days. Even if you have only entered 1 positions for this advisory, you would have made $170 per position. Since this advisory makes 21.25%, it will cost $21.25 in your September’s bill.
We have two more open positions for September. We’ll look for a suitable chance to close them asap.
We’ll talk again soon!
Good trading,
Gary
***********Trade History***********
14 Aug 2007
RUT (Russell 2000 Index) Iron Condor initiated on 14 Aug 2007
Trade Summary
RUT at 769.04
36 days to Sep expiration.
Sell RUT Sep 860 Call
Buy RUT Sep 870 Call
Sell RUT Sep 690 Put
Buy RUT Sep 680 Put
For a net price of $2.00 Credit or better.
Total margin required: $800.
Trade Analysis
Amongst the indexes, the RUT is the least volatile. Unlike the Dow, which a triple-digit move is almost an everyday occurrence or the SPX, which can swing 20 points up one day and 30 points down the next. However, that is not to say that the RUT is the safest bet. Relatively, RUT moves more like a super-sized tanker (it’s got 2000 stocks in its calculation) while the Dow (only 30 stocks) and the SPX (500 stocks) behaves like a speedboat with very little inertial. Seeing how the market is so uncertain lately, we will trade lightly for this month. This RUT condor is one of the few trades we’ll be more confident of.
As usual, we set up this condor for 1 standard deviation (see chart).
Our breakeven points are at 862 on the upside and 688 on the downside. That is a 174-points-wide profitable range. As of now, we have about 69% chance of profiting from this trade and it has a delta of only -0.36. The last RUT condor we had (which is currently still open the call spread) had had a 110-point-wide range. We are able to get such a wide range this month because of the high IV environment. The VIX (the index for implied volatility, IV) is currently at 27.16 as I’m writing this analysis. The VIX peaked at 28.3 on 10 Aug. It is good to sell condors in high IV environment since iron condors are negative vega (short IV). However, this is not to say that IV cannot go higher than what it is now in the next few weeks. Any goes in the market lately.
1 standard deviation may no longer be as safe as it used to be in this highly volatile environment. As we have seen, for the last RUT, we had to make several adjustments to the condor to keep it alive. Adjustments are bad because it normally eats into our credit and therefore our profit. The lower the premium we collected the higher our risk. In short, adjustments increase our risk exposure! Not decrease. When we recommend an adjustment, you must know that it is normally the last resort. The alternative is to face a loss. So, will we have to adjust for this condor? Well, we’ll try to avoid it as much as we can. We have this trade in our personal accounts too you know. We have as much vested interest to keep this trade profitable as you.
That said, we shall set up our defences now that danger is pretty far away. When enemies are near, we tend to use more emotions and logic. Since our short call is 860, we shall set our alarm 30 points out at 830. Our short put is 690 and thus, our alarm will be at 720. As long as RUT trades between this 170 points range for the next 30+ days, this trade will work out fine.
As you can see from the daily chart, the RUT seems rather bearish at the moment. But seriously, nobody really knows what will happen next isn’t it? It is currently below all its moving averages so it may be quite a task to overcome all these resistance. However, do note that the way the moving averages failed to serve as support when the RUT fell means that there is a high chance that the moving averages may fail to act as resistance on the way up. As of now, this trade is good. But who can be so sure that this trade will remain good for the next 36 days?
We will keep an eye on this trade and inform you accordingly when there is a need to adjust anything.
Good trading,
Gary
Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com
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