SPY (Standard & Poors Dep Rec) Call Vertical initiated on 20 Aug 2007
21 Sep 2007
SPY (Standard & Poors Dep Rec) Call Vertical initiated on 20 Aug 2007
Trade Summary
SPY at 152.64
0 days to Sep expiration.
Buy SPY (stock) at 152.63 (or current price)
Sell SPY Sep 153 call at $0.15 credit.
Buy back the same amount of short SPY you have been assigned and sell the remaining long SPY 153 call for $0.15 credit.
Profit or Loss: -$94 per position
Trade Analysis
First things first, let’s do some stock taking. We were short this iron condor for $0.55 credit on 20 Aug. We got assigned this morning on our short 151 call, which means we sold SPY at 151. We then bought back our short position by buying SPY at the market price of $152.64. This shorting and covering transaction resulted in a loss of [152.64-151] $1.64 per position. However, because we collected $0.55 per position when we initiated the trade, this loss is reduced [$1.64-$0.55] to $1.09 per position. Furthermore, we sold our remaining long 153 call for $0.15 so our final loss for this trade will be [$1.09-$0.15] $0.94 per position.
We were comtemplating on closing this position yesterday for a loss of between $0.70 to $0.80. We decided not to lock in the loss yesterday because we believe there was a chance that SPY may open lower today. We took our chance but it turned out against us.
The fact is we did try to close up this position before the Fed announcement. But because the market was trading at low volume, we couldn’t get it filled at out target price. SPY is one of the most liquid underlyings around mind you. We expected some volatility after the Fed but we didn’t foresee the pace and magnitude of the move. Things could have easily turned the other direction after the Fed. We figured that there was a 50:50 chance that the market will move in either direction after the Fed announcement. Even if it were to be an up move, we should have a chance to get out of our trade when the market pulled back after the initial knee-jerk reaction. However, there was no knee-jerk reaction nor any pull back. It was up, up and up in double quick time!
Like hot knife slicing butter, the rally following the Fed’s interest rate cut turned our position into a loser in a blink. The 0.5 percent cut was unexpected by many economists and analysts. Likewise, the resulting rally was unexpected as well. We expected either a small rally or a mini crash, which our position should be able to survive through. The SPY closed at 148.10 the day before the Fed. It could have rallied 30 SPX points after the Fed and we will still be pretty safe. But it rallied more than 40 SPX points.
Many people are currently trying to figure out the effects of the interest rate cut. The dollar is at one of its lowest points in recent history. This depreciation of the dollar may be the driving force behind the record gold prices, which is trading at 27-year high. Crude is at record high as well due to predicted high demand for winter and the Iran nuclear crisis. We all know well that crude and stocks are inversely correlated but both are moving up in the same direction currently. Bernanke warned that the worst is not over but looming. Greenspan’s probability of a recession stands at one-third. When interest rate goes down, dollar goes down, so do treasury bills, since US-dollar assets will have lower returns. But 10-year treasury bills are trading higher today! Like I said many people are trying to figure out what will the interest cut do. The mood is thus jittery to say the least. Expect volatility in the market as it is currently very news-driven. We will keep a close watch over the open positions that we have on.
Gary
P/S: Sorry to cause any alarm over the assignment of this trade. We understand that there are many subscribers who are new to trading options and were shocked by the assignment. I’d like to take this chance to remind our subscribers that all our trades have pre-defined and limited risk. We know our maximum possible loss when we enter the trade.
************Trade History***********
20 Aug 2007
SPY (Standard & Poors Dep Rec) Call Vertical initiated on 20 Aug 2007
Trade Summary
SPY at 144.63
31 days to Sep expiration.
Sell SPY Sep 151 Call
Buy SPY Sep 153 Call
For a net price of $0.55 Credit or better.
Total margin required: $145.
Trade Analysis
The market will be volatile and difficult to trade for neutral traders like us during these times of uncertainty. This is the time when we trade lightly and stay vigilant against any potential upheaval to our positions.
With this trade, we are technically bearish. Whether we will add a put side to complete the iron condor in the coming days, we’ll wait and see if we can see a confirmed bottom. The last time we legged into an iron condor was the IWM iron condor for August. It turned out a rather good trade, could have been better though. As it is, we are taking a directional bias at the moment. And this bias is taken not without careful analysis.
Although last Friday’s Fed announcement pushed the market up by a huge gap, after close analysis, it seems that the gap up may not be the end of the downdraft. Some called last Friday’s gap up the end of the correction. I think it seemed more like a correction (of the downdraft) itself. How the market will move for the coming days or weeks? It’s anybody’s guess. But the charts seem to suggest that the maddness is not over.
On Thursday, the market plunged to it new recent-low. We thought that was it. The market was going to slice through the March lows. However, the market braced itself and bounced off the lows. On Friday, the Fed made an announcement just before the opening of the market and the market gapped up. Friday was options expiration Friday, which typically sees high trading volume. However, the biggest piece missing in the impressive Friday rally was the volume. Volume was much lower than on Wednesday or Thursday. In fact, for the whole of last week, volume had been high when the market made new lows day after day. But when it comes to a rally with such nice excuses for a rally, the volume isn’t there! What does this mean? This means that institutions (the so-call smart money) are not actively buying shares. Without the huge trading volume of insitution participation, any massive move (up or down) can be taken away in a very quick time. Furthermore, the gap up didn’t find traction from the start. The market gapped up and spent the rest of the day drifting lower.
If you look at the chart, you will see why we believe the SPY is not entirely out of the water yet. It is currently below 20-, 50- and 100-day MA as well as its current trendline. Unless the bulls can break through these multiple resistance with high volume, we believe the SPY may head south to test its support at around 137 level.
We will keep a close look at this trade and inform you accordingly when it’s time to adjust or close the positions.
Gary
Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com
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