***Closed***RUT (Russell 2000 Index) Iron Condor initiated on 16 Apr 2009
19 May 2009: Expiration notice
RUT (Russell 2000 Index) Iron Condor initiated on 16 Apr 2009
Trade Type: High Probability, Low Reward Iron Condor
Trade Summary
19 May 2009
All options expired worthless on Friday.
Profit or Loss: +$100 per entry.
Analysis
The RUT was settled at the price of 481.87 on Friday and thus all our options in this trade expired worthless. For this RUT iron condor, we made $100 with every entry we entered. On hindsight, we could have made more. We were right that a pullback is imminent but we stuck to our trading rules to roll our call spread. Had we not rolled, we could have easily doubled our profit!
Some will say that rules are meant to be broken. But not trading rules! We made the rules when we entered the trade, when we were clear-headed. It is very easy to be affected by current market emotions when we’re facing a loss or a profit. These rules are important to prevent us from taking on excessive risks. With such a high R3 iron condor, we should always be very careful with our risks.
We made $100 per entry using $780 of margin. That is a modest 12.82% returns.
Good trading,
Gary
6 May 2009: Roll up call spread.
RUT (Russell 2000 Index) Iron Condor initiated on 16 Apr 2009
Trade Type: High Probability, Low Reward Iron Condor
Trade Summary
6 May 2009
RUT at 505.57 (+3.13)
8days to May expiration
Action: Roll up call spread.
Buy to close RUT May 530 Call
Sell to close RUT May 540 Call
Sell to open RUT May 550 Call
Buy to open RUT May 560 Call
For a net price of $1.10-1.20 debit or better. [All TOS auto-trade participants were filled at $1.20 debit.]
Analysis
The RUT had been trading around the 500 levels for days and managed to poke through it a couple of times only to fall back below 500, just slightly. Our original strategy was to wait for a pullback to do a roll up so that we can do it on the cheap and keep more of the credit we’ve collected. However, the pullback never happened. And as the RUT advances higher today, the risk this trade is facing gets higher.
Because we are risking a lot more than what we can make (risk/reward ratio was 3.55), we have to be very careful with the risk.
We’re not too sure what will happen tomorrow but we’re very sure of a loss if we don’t manage our risk well enough. There’s a high chance of a pullback soon and it may happen tomorrow. But as long as it has not happened and as long as the RUT is advancing higher, our risk is getting higher to the point that the risk we’re taking is not worth the potential profit.
And so we adjust.
We are basically closing up the original 530/540 call spread and selling another 550/560 call spread. This action shifts our breakeven point higher. Our original breakeven point on the upside was 532.2. After this roll, our breakeven point on the upside is now 551.
Of course this adjustment comes at a price. $1.20 to be exact. (This same adjustment can be filled at around $1 now. The RUT has backed off quite a bit as I’m typing. Argh! That’s the market isn’t it?) We collected $2.20 in credit when we initiated this iron condor. Now, we’re paying $1.20 to do the roll adjustment. That leaves us with only $1.00 in credit. If the RUT trades between 430 and 520 for the next 8 days, we can have a profitable outing with this trade, albeit a smaller profit.
We’ll continue to keep a lookout for this trade. We will most probably close up the entire trade when we can get out at a low price.
Good trading,
Gary
*****Trade History******
16 Apr 2009: Initiated trade
RUT (Russell 2000 Index) Iron Condor initiated on 16 Apr 2009
Trade Type: High Probability, Low Reward Iron Condor
Trade Summary
16 Apr 2009
RUT at 470.69 (+9.57)
28 days to May expiration
Action: Sell a new iron condor for May expiration.
Sell to open RUT May 530 Call
Buy to open RUT May 540 Call
Sell to open RUT May 400 Put
Buy to open RUT May 390 Put
For a net price of $2.20 credit or better.
Net margin required: $780 per entry
Analysis
This is our first trade for May. Our April results were not fantastic but at least we remained profitable. Hopefully we will have better results for May. We are trying to target for 3 trades in May. In April, we only had 2 trades.
This RUT iron condor is our bread and butter each month. For this iron condor, we are risking $780 to make $220 with a probability of success of about 72.23%, which is slightly more than 1 standard deviation.
We are looking at a risk/reward ratio (R3) of 3.55.
As you can see from the P&L chart above, our breakeven points are 532.2 on the upside and 397.8 on the downside. As long as the RUT trades between these 130 points, we are profitable.
RVX is down more than 4% today. We had been on the sideline waiting for a pullback and thus a rise in the RVX to initiate this iron condor. But premiums is drying up very quickly now that we are only 28 days away from expiration. For a $2.20 credit, this trade is still a viable trade regardless of the RVX.
Since we are risking a lot more than what we can potentially make, we have to be pro-active in managing our risk exposure before it is too late. As usually, we will set up our mental stop at 30 points away from our short strikes. Since we are short the 530 call, we shall set our mental stop at 500 and since we are short the 400 put, we’ll set our mental stop at 430.
When the RUT trades pass 500 or under 430, we should be ready to make adjustments to protect our trade and manage our risk. We may roll or we may simply close the bleeding side.
A 20+ points move is not normal for the RUT but we saw that happening a while back. A market that moves 4 or 5% a day is difficult to trade unless you are a superb direction picker.
Our outlook for the next 20 odd days is neutral with a higher chance of going down than up. It is too late to join the bull run at this point as the market has been up for so many days. Any bad news will cause a major pullback. To be bearish now defies logic too. If there is a low-risk directional trade, we will inform you and trade it under our “bonus trade”. For now, we’re waiting for a correction.
That’s all for now folks!
Good trading,
Gary
