RUT (Russell 2000 Index) Iron Condor initiated on 22 May 2008
| 16 Jun 2008
RUT (Russell 2000 Index) Iron Condor initiated on 22 May 2008 Trade Summary RUT at 737.98 (+4.37) Buy RUT Jun 690 Put For a net price of $0.20 Debit or better. Trade Analysis This trade would have been a nice big winner if not for the adjustment on 5 June. Immediately after we adjusted, the market crashed big time. In fact, the RUT got so low to a point that we almost have to adjust our put side! Let’s take a step back to review our actions to see if I have committed any unnecessary mistakes. When I put up this trade on 22 May, I set up a mental stop at 750 and 720 levels, which are about 5% away from our short strikes. On 5 June, the RUT rallied up strongly and breached the 750 mark. With the risk of the RUT advancing higher after the rally, I decided to reduce the upside risk by buying back the call spreads. At that point, this seemed like the wise thing to do. Then came the crash the following day on 6 June. In all honesty, I did not forsee and could not have predicted the crash just the day after the major rally that managed to close above a major resistence. That crash on Friday made our adjustment just the day before looked silly and redundant. If we hadn’t made the adjustment on 5 June, we would have profited nicely with this trade. This iron condor did not perform well mainly due to the uncommon price actions. We had a plan and we acted on our plans when the need arose. I think I’ll still make the call to adjust on 5 June even if we can turn back time. Even though this trade didn’t work out too well, it didn’t lose money! We sold this iron condor for $2.10 credit on 22 May, we bought back the call spread on 5 June for $1.75 debit (I got it at $1.90!) and today we are closing the entire trade by buying the remaining put spreads for $0.20. Those of you on auto-trade in fact made a tiny weeny profit of $15 per entry. Percentage wise, all auto-trade participants made 1.9%. After commission, we are almost flat for this trade. Since this trade didn’t work out the way it should and the profit is insignificant, this trade will be free of charge for your June’s bill. It’s a pity we didn’t make money with this trade. However, it is more fortunate that we didn’t lose money in such market conditions. Good trading, Gary ****************************Trade History******************************** 5 Jun 2008 RUT (Russell 2000 Index) Iron Condor initiated on 22 May 2008 Trade Summary RUT at 758.94 Buy RUT Jun 780 Call For a net price of $1.80-1.90 Debit or better. [all tos auto-trade participants were filled at $1.75 (I got mine at $1.90!)] Trade Analysis Just yesterday the RUT was stopped promptly near the 750 level (the 200-day MA level). With great strength, the RUT crossed the 200-day MA when the market opens earlier today. Our alarm of 750 was activated earlier today. Once the 200-day MA is broken, the RUT can easily advance higher in the coming days. Pull out a RUT daily chart and you can see that the 200-day MA is the last resistance level. Once it clears the 200-day MA, the space above provides a void that can be easily filled up. While I am unable to predict if the RUT will indeed go higher or today’s action is a fake breakout, the ease that RUT can break a major resistance makes me uncomfortable with this call spread. Our alarm was triggered and after looking at the price-action and technical aspect, I decided it would be wise to close up this call spread now before we incur any significant loss. As I’m typing this analysis now (14:15 EST), the RUT is starting to make a U-turn. So it will be interesting to see if the RUT will close above the 200-day MA today. This same call spread is trading at $1.70 now. I was filled at $1.90! Hopefully you guys out there can get it at a better price than me! We still have another RUT iron condor for June. The alarm for that condor has not been activated. Let’s hope it stays that way. The rest of our positions are looking pretty healthy at the moment. Market has been rather choppy and unpredictable lately. We’ll see how things go on from here. Good trading, Gary *******************Trade History************************** 22 May 2008 RUT (Russell 2000 Index) Iron Condor initiated on 22 May 2008 Trade Summary RUT at 733.53 Sell RUT Jun 780 Call For a net price of $2.10 Credit or better. Trade Analysis This is our second RUT iron condor for June. It is essentially the same iron condor that we initiated on 14 May except that the call spread is one strike lower. For the 14 May iron condor, we were short Jun 790 and long Jun 800 call spread. Note that now we are shorting the Jun 780 call and buying Jun 790 call. This will lead to a cancellation of the Jun 790 calls. We were short Jun 790 calls for the 14 May condor and we are long Jun 790 calls for this condor. If you have entered the same number of positions for both condors, you will see that you have a net zero position for Jun 790 calls. The best way to deal with this is to view these two condors as two separate trades. Keeping a trade journal will be the best idea. Anyway, let’s talk about this trade. We are risking $790 to make $210 with a probability of success of about 70.5%. Our risk/reward ratio (R3) is 3.76 [790/210].
As you can see from the P&L chart, our breakeven point is 782.1 on the upside and 687.9 on the downside. This trade currently has a delta of -0.48, which is very neutral at the moment. Because we are risking more than 3 times of we can possibly make from this trade, we have to be very careful that we do not suffer the maximum loss. Although the maximum loss is defined and fixed, we definitely don’t want to lose $790 to try to make $210. As such, we have to be ever ready to perform any adjustments when the need arises. Adjustments are something we try to avoid altogether because it normally means increasing the risk as well as lowering the potential reward. However, many times adjustments can turn a losing trade into an eventual winner. Although I don’t plan for this trade to fail, we have to start thinking about the “what ifs”. Similar to the previous RUT iron condor, we shall set our mental alarm to about 30 points away from our short strikes. Since we are short 780 call, our mental alarm should be set up at 750. Likewise, since we are short 690 put, our mental alarm shall be at 720. When the RUT trades above 750 or below 720, we should brace ourselves for some adjustments. So watch out for these two levels and hopefully, the RUT will trade between this two levels for the coming weeks! Gary Founder, Head Trader of MarketNeutralOptions |
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