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RUT (Russell 2000 Index) Iron Condor initiated on 8 Jan 2008

Trade Summary

RUT at 705.53 (+3.87)
7 days to Feb expiration.

Buy RUT Feb 790 Call
Sell RUT Feb 800 Call
Buy RUT Feb 610 Put
Sell RUT Feb 600 Put

For a net price of $0.20 Debit or better.
Profit/Loss: $75 per position

Trade Analysis

This iron condor nearly died. For the purpose of some perspective, RUT was trading at 720 when we initiated this trade on 8 Jan. During the course of the short 29 days or so, RUT hit as low as 671 on 22 Jan. That was a 49 points move. On hindsight, we could have stayed on with this trade without any adjustment. Hindsight is always 20/20.

Initially, we were short Feb 650 put. We placed an alarm at 680. When the RUT came down fast and furious, we followed our plan to roll down the put spread. Was it a good move to adjust since we were expecting a pullback soon at that point in time?

Anyway, I’m just glad that this trade is profitable. So far, none of our trades for Feb is a loser. YEAH! You saw how the market behaves for the past weeks.

This iron condor makes $75 per position. Not an impressive amount I must say. But a profit is a profit. This iron condor made 10.07% returns in 29 days and therefore will cost $10.07 [75/745 X 100%].

This amount will be reflected in your bill for Feb.

Good trading,

Gary

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

22 Jan 2008

RUT (Russell 2000 Index) Iron Condor initiated on 8 Jan 2008

Trade Summary

RUT at 673.99 (+.81)
22 days to Feb expiration.

Buy RUT Feb 650 Put
Sell RUT Feb 640 Put
Sell RUT Feb 610 Put
Buy RUT Feb 600 Put

For a net price of $1.45-$1.60 Debit or better.
Total risk: $905 per position (assuming you were filled at $2.50 credit during initiation and $1.55 debit for the roll)

Trade Analysis

The rate cut works! Well, at least for now. We have enough of bad news lately, so let’s start off with the good news: this condor is still alive! We’re still in the game. Not an easy game really and we can still turn up a loser in 22 days’ time. Right now, the bears and the bulls are fighting it out, which is good for us because such fights take time and time wasting is good for us, positive theta people. Technically, the market is extremely oversold and a sharp rally is long overdue. The Fed cut may by the stimulus we need to encourage such a rally. The final piece of good news is that RUT is trading surprisingly relatively stronger than the other indexes.

Now the bad news: the market breadth today is negative despite the “rally”. I suppose a recovery of a 460+ Dow points loss can be considered a mini-rally of sort. Market breadth is the net difference between the buying and selling volume. Despite the dramatic comeback from the opening gap down, breadth is still negative, meaning there are more people selling than buying. Such a rally without the support of a firm breadth ratio can be easily invalidated. In fact, the bears are waiting for a sell-off before the day’s end. Well, this could be a very real event as long as there is no strong positive breadth. Volatility indexes such as VIX, VXO and RVX are at their highs. This suggests that the market expects more volatile sessions ahead. Many bears are complaining that this emergency rate cut is too little too late. Technically, we are now in a bear market. There has been so much damage done to the technical chart that it’s almost pointless to talk about support or resistance. Lastly, don’t forget we’re in earnings season. Any bad earnings and the market can easily overreact to the downside. Chances of an overreaction to the downside than an overreaction to the upside.

We decide to take advantage of this “mini-rally” to roll down our put spread. Of course we can choose to close up the put spread altogether and lock in a small loss. But looking at how oversold we are now and the ever increasing chance of a sharp rally soon, we decided that to roll will be a better option. Now, do note that the rally here doesn’t mean the bull market has return. A rally will simply be a pause in selling. As long as we remain in the down trend, any rally should be considered as a pause in selling and shortable. What we like about this sharp decline and sharp rally market is time wasting.

Hopefully the market will take some time to consolidate and establish a base. By moving our short put to 610, we are now about 64 points away from our short put. This distance should be enough to survive a 30+ points RUT crash.

Since we are currently short 610 put, we should set our alarm to 640. We should sit up and be ready to adjust when the RUT trades below 640.

Hopefully we don’t have to adjust this condor any further.

Good trading,

Gary

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

18 Jan 2008

Panic in the market! No doubt the bears are fully in control lately. How low can it go? This must be question everyone is asking right now.

The RUT trades pass our preset alarm of 680 for this iron condor trade. This is something we all dread isn’t it? When RUT gets near our short strikes, we know we’re facing a loss.

At the moment, the Feb 650/640 put spread is trading at $2.60. We can buy back this put spread now to eliminate all downside risk associated with this iron condor. We’ll make a loss of $0.05 per position if we can get filled at $2.60 to buy back the put spread. But is this a wise move to take at this time?

The purpose of this update is to provide discussions on the better next course of action.

With 26 days to expiration, we don’t really want to close up this trade and lock in a loss, albeit a small one. The reason is simple. Whatever time decay we have earned for the past days, we are giving it back to IV. Bear in mind that the options are still OTM, the same way they were when we initiated the trade. The difference between now and then is the level of fear in the market, that is, the IV. The VIX has risen about 4 points since we initiated this trade. So there you go.

Of course, like I always mention, this iron condor is a high R3 condor that requires a more proactive management. That is why we are discussing about doing an adjustment now.

The chart below shows the RUT weekly. You can see that the RUT is currently testing the lows in July 2006. This final support level is at about 670. Today’s close is important. If RUT were to break this support of 670, the next support level may be found at 650, which is the lows in Aug 2005 and the highs in Dec 2004.

Now, this is what we plan to do. We shall see where the RUT closes today. If it were to close decisively lower than 670, we have to adjust as soon as we can. Most probably we will roll down the puts so that we can savage as much credit that we have collected as possible. Alternatively, we can close the entire put side to eliminate all downside risk. We’ll do this if we can get out without suffering a major loss.

If RUT does not close below 670, we should still be ever ready to adjust as long as it stays below 680. The RUT may have a bounce in the workings soon. When that bounce happen, we may look to close up the put spread with a smaller debit. If we can close it at $1.80 or even $2, and signs are that the bounce is a dead-cat bounce, we should be glad to close it and lock in a small profit.

You see, I can’t really tell you what you must do because there are simply too many variables to be aware of. We need to take into consideration the number of days left to expiration, the IV level and the charts. For example, we may not want to do a roll when we have only a week left and the charts are telling us it’ll go lower.

I hope I’m not confusing you guys. I just want to reassure you that our condors are still alive. Yes, they are a bit shock by the tremors, but they are not dead.

We’ll be in touch. At the mean time, keep your cool people!

Good trading,

Gary

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

8 Jan 2008

RUT (Russell 2000 Index) Iron Condor initiated on 8 Jan 2008

Trade Summary

For a net price of $2.50-$2.60 Credit or better. *TOS auto-trade participants were filled at $2.50*
Total margin required: $750 per entry.

Trade Analysis

Normally I’d like to initiate high R3 iron condors like this one less than 35 days before expiration. However, the price today seems too attractive to not grab it.

As you can see from the P&L chart below, the probability of RUT expiring within our profitable range is 71.25%. Our breakeven points will be at 792.5 on the upside and 647.5 on the downside. This position is currently very neutral, having a delta of -0.88. As long as RUT trades between these breakeven points for the next 36 days, we’ll have a winner.

To be honest with you, I have no idea where RUT will be in 36 days’ time. This market can go anywhere as of now. Currently, the market is showing some indecision as the bulls and the bears are fighting it out. Soon there will be a winner. As of what we can see now, the immediate term favors the bears. Let me present the bears’ case first. It has been outright bearish since the beginning of the new year and there were a few rather serious distribution days in the past few trading sessions. There is no viable support in the chart of the RUT and therefore RUT is likely to follow the path of least resistance and continue lower in the coming days.

Now for the bulls. The market is oversold and bargain hunters will step in soon to grab valuable stocks in the cheap. RSI readings confirms the oversold condition. Once bargain hunters step in en masse, short sellers will be forced to cover their shorts. This will create a sudden rush of demand and a spike in price. The sharp drop in price we saw in recent sessions will offer no resistance when buyers step in.

It takes a lot of courage to be a bull at the moment but what the bull camp has in mind in not entire unreasonable. Like I said earlier, the market can go anywhere from here. It can go lower still as the bear camp believes. It may start to reverse like the bull camp hopes. It can go nowhere, drifting along with time.

As the next earnings season kick off, we should brace ourselves for more volatility in the market. And don’t forget the Fed! FOMC meetings have a great effect on the market. With so much uncertainty, it is good that this position is currently as neutral as it can be.

From the daily chart below, we can see that the only support in sight for the RUT is in Jun and Jul of 2006. It is likely that the RUT may test that support once again. But how long it’ll take to reach there is the more important question for us.

Because this iron condor has a R3 of [750/250] 3, it is a high R3 iron condor that requires more proactive management. We should define our alarm at 30 points (about 4% of current value) away from our shorts. When RUT trades below 680 or above 760, we should be ready to make adjustments or simply close up the trade altogether.

We will keep a close look at this position and inform you accordingly when more actions are required for this position.

Good trading,

Gary

Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com