***Close***IWM (iShares Trust Russell 2000 ETF) Iron Condor initiated on 3 Mar 2009
19 Mar 2009
IWM (iShares Trust Russell 2000 ETF) Iron Condor initiated on 3 Mar 2009
Trade Summary
IWM at 41.86 (+0.02)
1 days to Mar expiration.
Buy IWM Mar 38 Call
Sell IWM Mar 40 Call
For a net price of $1.90-1.91 Debit or better. [All TOS auto-trade participants were filled at $1.91.]
Profit or Loss: -$92 per entry.
Trade Analysis
Well, it seems like the bulls are stronger than what they looked like after all. For a moment today, it seemed like our decision to wait for another day was a right move. However, the market did not seem to be going any lower than the lows of today. The bulls have strength and it seems more and more unlikely the IWM will fall below 40 today. As long as the IWM holds above 40, this trade will see its maximum loss of $1.01 by tomorrow. Judging by the market internals, the bears aren’t winning the fight. We need a pretty big selloff to fall below 40 or 38 for that matter and we’re not seeing it happen today.
So, we’ll throw in the towel on this trade and move on. If we had done the same yesterday, we could have bought back the call spread at $1.70. But if we were to hole on to tomorrow and IWM continues to trade above 40, it’ll cost $2.
On hindsight, we could have profited from this trade had we closed it earlier. There were days where we could have locked in $0.20 to $0.30 profit. Well, on hindsight we’ll all be millionaire isn’t it. We simply didn’t expect such a strong rally on the IWM. IWM was showing relative strength vis-a-vis the Dow and SPX. Bad judgement on our part. This trade was a small winner turned big loser story, one of the worst trades we had in recent times.
With this close, we’ll warp up the month of March in the red. We are fixing up our performance page. Once it’s up, you’ll have a better idea of how we fare so far. Not an easy market to trade, but we didn’t do too bad.
We will be adding new trades for Apr in these coming days.
Good trading,
Gary
******Trade History******
18 Mar 2009
Update…
I understand that you must be concerned about the fate of this iron condor (the last one we have for Mar). This rally is causing our trade to bleed rather badly. With only 2 days left to expiration, our hands are rather tied at the moment.
We could close the call spread today and lock in a loss of about $0.70 per entry. The IWM looked like it was falling apart just 2 days ago and we thought we could have a nice exit then. What we didn’t expect was the rally that followed yesterday and through today. This trade looks awful today. It is so tempting to close it, take in the big loss and move on. However, after studying the charts, we decided to wait for another day.
That is why I’m informing you of our thinking here. To buy back the call spread at $1.70 debit today and see that we could have done the same tomorrow for a lot less is going to be painful. Similarly, if IWM were to continue its rally tomorrow, then $1.70 debit would be a steal and we’ll be kicking ourselves for not closing it sooner. I hope I made you see the dilemma here.
We studied the trading volume for the past 2 days and it showed that trading volume was lower on days of rally. This suggested that the rally may not be widely supported by the major players in the market. Without strong volume support, any major move (up or down) can be easily undone. Now, I’m not predicting that the rallies that we are seeing are going to come tumbling down but I’m suggesting that the data tells us that the rallies are not as solid as they seem.
If you pull out a daily chart of the Dow or SPX, you can see that these 2 majors indexes are facing a resistance to their rally. This resistance may stop the major indexes from advancing higher any time soon. Although the Dow and SPX are not directly coorelated to the IWM, we believe that it will be difficult for the IWM to continue to rally without the Dow or SPX doing the same.
Also, it is Fed day today. Market tends to be erratic on a Fed day. So it adds another reason to wait for the dust to settle.
In short, we believe that biting our teeth with the pain now may be more rewarding than to bite the bullet now. We decided to wait out for another day. We believe that we are not risking a lot more by waiting another day. We are already $0.70 in the red. The most we can lose is $1.01 on Friday. Yes, there will be risk as I mentioned above. Whether this risk is worth taking is for you to decide. I’m suggesting we take the risk. This bear rally seems to be losing steam (I may be wrong). The worst scenario is that we’ll lose the maximum of $1.01 per entry on Friday. But this loss won’t wipe us out although it is painful.
Of course, we hope our decision to wait out another day is a good one. Like yourself we are in this trade too and we understand all too well the pain of seeing losses. But it is during this time of distress that a clear mind is more important than hasty decision made in a moment of strong emotion. There will be risk and there will be losses. The key is to have more winner than losers.
P/S: the Fed announcement has just caused the market to rally up big-time. We can only see clearly after the dust settles in the next few days. For now, bear with the pain, it won’t go a lot worse.
Good trading,
Gary
******Trade History******
3 Mar 2009
IWM (iShares Trust Russell 2000 ETF) Iron Condor initiated on 3 Mar 2009
Trade Summary
IWM at 36.19 (-0.77)
17 days to Mar expiration.
Sell IWM Mar 38 Call
Buy IWM Mar 40 Call
Sell IWM Mar 34 Put
Buy IWM Mar 32 Put
For a net price of $0.99 Credit or better.
Total margin required: $101 per position.
Trade Analysis
This is our 3rd trade for March and very likely to be the last unless we can spot another trade that offer us very good risk/reward.
This is a low risk, low probability iron condor, similar to the SPY iron condor we initiated on 25 Feb. For this iron condor, we are risking only $101 to make $99 for every entry. This gives us a risk/reward ratio (R3) of 1.02. This means that we are risking $1.02 to make a dollar.
This iron condor has a 49.09% probability of success (see P&L chart below). Our breakeven points for this iron condor is 38.99 on the upside and 33.01 on the downside.
Since this is a low R3 condor, we can afford to be more patient to wait for this trade to become profitable. This is because with such a narrow profitable range (of about 6 IWM points), we will be stopped out very easily if we define a stop at 2 points away from our shorts. Instead, for this kind of low R3 iron condors, our mental stop should be price-based. Since we are collecting $99 for each entry, we hope to close this trade for less than $99 in order to profit from this trade. We shall set our mental stop at $1.25-$1.30. Do note that this mental stop is a price level at which we should reassess the situation and the trade and then decide on a course of action. We may decide to close it and suffer a small loss or roll it or do nothing. Our adjustment will be determined by the market conditions of the day.
Gary
Founder, Head Trader of MarketNeutralOptions
www.MarketNeutralOptions.com
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