***Closed***RUT iron condor initiated on 20 July 2009
21 Aug 2009: Options expired worthless
RUT (Russell 2000 Index) Iron Condor initiated on 20 July 2009
Trade Type: High Probability, Low Reward Iron Condor
Trade Summary
21 Aug 2009
RUT at 579.78 (+11.1)
-1 days to Aug expiration
Action: Do nothing, remaining options expired.
Profit or Loss: -$310 per entry.
Analysis
On hindsight we could have locked in a small profit if we didn’t close up the call spread on 12 Aug. This is the worst loss for 2009. The last time we had a larger loss was exactly 1 year ago in Aug 2008! Let’s hope we don’t suffer losses of such magnitude for the rest of the year. This is a terrible loss indeed. It put us back by several months.
Should we have taken the risk and waited a few more day for the correction to happen, we could have made a small profit and averted any loss. However, situation at that time demanded that we reduce our risk by closing the bleeding spread. We have to close to lock in the loss at that point in time because we will suffer even greater loss should the RUT continued its rally.
Well, losses are inevitable in trading. We just have to make sure we win more than we lose. Like I said, losses of such magnitude is rare. This is because market movements like those we saw for the past few weeks were rare too.
A few subscribers have lost a big chunk of their account in this trade because they entered too many positions. I would like to take this opportunity to remind our valued subscribers to be consistent in allocating your funds. Do NOT risk more than 50% of your account in any one trade. Losses will happen and you surely don’t want to have 1 failed trade wipe you out of the market.
Since index iron condors (RUT and SPX) usually need a margin of around $800 per entry. As a general guide, do NOT enter more than enter more than 4 entries for every $10,000 you have in your account. This will be a figure I’ll be comfortable to stretch to. However, please bear in mind, this is just a personal guide which I use. Each of us has different risk appetite so I really can’t decide for you how much you should be risking. I hope by sharing with you how I allocate my funds helps you in some way to manage your risk.
Stay consistent to avoid entering more entries on losers and less entries on winners. You’ll be able to see your account grow in a few months because our trading records have been rather consistent in showing profits.
Good trading,
Gary
*****Trade History*****
12 Aug 2009: Close call spread
RUT (Russell 2000 Index) Iron Condor initiated on 20 July 2009
Trade Type: High Probability, Low Reward Iron Condor
Trade Summary
12 Aug 2009
RUT at 576.86 (+14.70)
8 days to Aug expiration
Action: Close call spread.
Buy to close RUT Aug 580 Call
Sell to close RUT Aug 590 Call
For a net price of $3.60-3.70 debit or better. [All TOS autotrade participants were filled at $3.70 debit.]
Analysis
The bulls are unstoppable! We all know too well that market usually reacts erratically on a Fed day and we usually try to avoid adjusting or initiating trades on a Fed day. But the moves today has been adding strength to the bull-run. There were signs that the bull-run was exhausted just yesterday when the RUT dropped by 8 points. For a moment, the long awaited pullback that many traders were expecting finally seemed to come. Going into today, we expect wild swings due to the FOMC announcement on interest rates. But what we’ve seen so far is a rocketing market shooting up very quickly and staying up there.
We have no choice but to close our call spread for this RUT iron condor and we’re very likely to register a loss on this trade. We are currently less than 20 points away from our short call of 580. Judging by the strength we’re seeing today, we won’t be too surprise to see a follow through rally tomorrow. Another 15 or 20 points move up tomorrow and we’ll be in worse position than today.
Just yesterday, we could have close this same call spread for a lot less and even though we would have most probably suffered a loss, it would have been a much smaller loss than now.
This will very likely to register our first loss since March 2009.
Going forward, we are still very skeptical about the rally and believe that the market is extremely over-bought. We still believe that a pullback is inevitable. We still have 2 SPY trades currently open. We’re hopeful that we can be profitable with these remaining trades to reduce our loss for August. Our current setup will benefit from any downward move in the SPY.
I will keep you posted when the time comes for adjustment or closure.
Good trading,
Gary
*****Trade History*****
23 July 2009: Roll up call spread
RUT (Russell 2000 Index) Iron Condor initiated on 20 July 2009
Trade Type: High Probability, Low Reward Iron Condor
Trade Summary
23 July 2009
RUT at 546.22 (+17.50)
28 days to Aug expiration
Action: Roll up call spread.
Buy to close RUT Aug 560 Call
Sell to close RUT Aug 570 Call
Sell to open RUT Aug 580 Call
Buy to open RUT Aug 590 Call
For a net price of $1.75-1.80 debit or better. [All TOS autotrade participants were filled at $1.80.]
Analysis
Earnings season is always difficult to predict. We’re not too sure how long this rally will last but it certainly looks a bit over extended. Personally, I’m quite skeptical about the sustainability of the rally. The last quarter was so bad that any results less bad will look good. Many banks posted amazing profits but we’re not sure how much of the profits come from one-time proceeds or the change in accounting rules. Is this a recovery or a bottom setting? But this is just a personal view. Apparently, the market is obviously not sharing the same view.
Our mental stop was breached in a very quick manner. Sure, there were warning signs, but the warning signs for a imminent pullback were also present. There is no sign that the rally will fizzle out today. Chances are high that we may just close at the highs of today and form a 9-month high. Our position will be in grave danger should that happen.
As such, according to our plans, we will have to adjust. Since there are still 29 days to expiration, it will be a good idea to roll up the call spread. We collected $240 in credit when we initiated this trade on the 20 July and today we’re rolling up the call spread for $180 debit, that leaves us with $60 in credit. Insofar, this trade is still above water. Potential profitability has certainly took a bashing by the roll but as of now, it is still profitable.
We hope to initiated a few more trades for August in the coming days. We’ll wait for the dust to settle before making any rash moves.
Good trading,
Gary
*****Trade History*****
20 July 2009: Initiate Trade
RUT (Russell 2000 Index) Iron Condor initiated on 20 July 2009
Trade Type: High Probability, Low Reward Iron Condor
Trade Summary
20 July 2009
RUT at 522.76 (+3.54)
31 days to Aug expiration
Action: Sell a new iron condor for Aug expiration.
Sell to open RUT Aug 560 Call
Buy to open RUT Aug 570 Call
Sell to open RUT Aug 470 Put
Buy to open RUT Aug 460 Put
For a net price of $2.40 credit or better. [All TOS autotrade participants were filled at $2.40 credit.]
Net margin required: $760 per entry
Analysis
This is our first trade for August. The last RUT iron condor worked out pretty well even though we have got to roll our put spread, we still managed a profit. For this current iron condor, we are risking $760 to make $240 for every entry. This gives us a risk/reward ratio (R3) of 3.17. As you can see from the P&L chart below, our breakeven points are 562.4 on the upside and 467.6 on the downside and we have a delta of -2.49.
Since this is a high probability low reward iron condor with a R3 of 3.17, we are not going to wait till the RUT trades near our breakeven points. As you must be pretty familiar by now, we will be deep in the red if the RUT ever trades near our short stirkes. As such, as always, we will set up a mental stop. Since we are short the 560 calls, we should be ready to make any necessary adjustment when the RUT trades near or pass 530. And since we are short the 470 puts, we should set up our mental stop at the 500 level. We always set our mental stops about 30 points away from our short strikes because a 30-point move (up or down) in a day is very rare. This will allow us some time and space to reassess the market and decide on the best adjustment to save our trade.
Earnings season is now in full force, we expect some volatility to return but the market should stay range-bound. We’re of the opinion that the market is currently overbought. But of couse, we all know that an overbought market can continue to be overbought.
Technically, we are seeing immediate resistance at the 535-540 level and support at 485-490 level. The 20-day and 50-day MA should offer some support (see the daily chart below). As you can probably tell, this iron condor is slightly, very slightly on the bearish side. Looking at the P&L chart above, you can see the our condor is slightly shifted to the left of the 1-standard deviation (lighter blue background) region. Our delta of negative 2.49 also provides us with some downside profit.
Of course, we can’t be sure of what is going to happen in the coming weeks. But based on what we can see now this trade is a very reasonable trade with a good probability of success as well as good R3.
We will be entering a few more trades for Aug in the coming days. We’ll be in touch.
Good trading,
Gary
The delta of the RUT 560 call is now at 39. What adjustments would you make now?
We’ve just sent out an adjustment alert. If you are our trial user, please check your email for details. At this point, we’re going to roll up our call spread to protect our position. We’re not sure how long this rally can last. It may continue up for a few more days before any correction. For now, a roll will make sure we’re still in the game.