120312 Track that Trade: Weeklys options

There is something seriously wrong with the SPX options. Either the market makers are insane of my bid/ask quotes are not accurate.

I was trying to sell one call spread and one put spread in SPX. The natural bid/ask spread for these spreads are:

  • SPX Mar 15 1340/1345 puts: less than zero to 1.00
  • SPX Mar 15 1390/1400 calls:less than zero to 0.95

Obviously bids of less than zero are meaningless and come about just becasue the bid/ask spread is wide. So here we have a situation in which there is no published bid, but the offer is $1.95. I cannot make this trade when seeking a credit of only $0.75. That is beyond unbelievable. The broker for this trade is Options House.

I canceled the order in disgust.


I moved to RUT instead. Here is the quote screen

8:54 am. After the order was filled


You can see the bid/ask spread for several different puts and calls. The specific iron condor I chose is:

RUT Mar 15 790/795P; 840/845C. Collected a credit = $0.80

Please notice: This trade is not delta neutral because the puts have a higher delta than the calls. I did this for two reasons. First the market has been more bullish than bearish lately, and I’m willing to trade just a LITTLE long. But more importantly for my portfolio – I am already a little short from other positions. Thus there is a good reason for me to tackle this Weeklys trade slightly off delta.

If you have any plan to follow this trade with your own account (I do not recommend taking that action), please be certain to choose strikes that suit YOUR needs.

My plan is to exit tomorrow or Wed.

When trading these short-term options, the real risk is that the options are not very far out of the money, and an overnight gap would result in a loss. Thus, my objective (yours may be different) is to EXIT with a profit. I will probably bid 35 or 30 cents Wed afternoon. If I cannot get out for that price, I must choose between holding another day (risk) and settling for a smaller profit conservative prudence).

I can afford to see the possible exit prices before making a final decision.

Update: end of day one

RUT closes at 814. Good news, so far.

Update: March 13, 2012

It’s 8:35 am, five minutes after the market opened.

Tuesday morning; 8:35 am


So far, so good. The condor bid ask is 25 cents to 80 cents, so we are ahead of the game right now.

I entered a bid of $0.30 to exit. Why?

  1. To exit with only one overnight holding period is fantastic. Holding overnight is where I perceive risk.
  2. Unless I hold through Thursday afternoon, I cannot imagine being able to exit for less than 20 cents total. So paying the extra dime to get out on Tuesday would be a big win.
  3. The big question is: just how much is it worth to exit one day early? Because holding is much more risky with short-term options (much less far OTM), I want to exit as soon as possible. If you own this trade, consider raising the bid (to 0.35 or maybe 0.40) before the day comes to an end.

Update March 13, after hours

I was away from my desk this afternoon and missed all the action.

Will outline plans tomorrow morning.

Update Wed, March 14. Before the opening

Here is the current situation:

March 14. 8:04 am

Note the following:

White arrow: Our RUT call option is less than 9 points out of the money.
Orange: The Mar 15 840 call has a 27 delta. Worrisome, but not an urgent problem. Any rally would cause concern.
Yellow: I am bidding 5 cents to exit the relatively safe put spread.
Red: I’ve set up the butterfly spread so I can get a quote. This represents a 5-point roll down.

At this point I can see three options:

  • Hold
  • Exit or reduce size
  • Roll down the call spread by five points

The bad news is that we are not all that far OTM.
The good news is that time is very much a factor. One day with no rally ought to make the cost to exit fairly painless.

The Greeks for our RUT calls: The call spread decays at 43 cents per day (at the moment). Reminder: When IV changes, theta also changes becasue the option premium changes – and theta is based on the option time premium.

The Greeks

8:45 am
The call spread is offered at 77 cents. This is essentially a break-even for us – although I do not know what it would cost to exit the puts.
Right now, still holding…

9:15 am RUT = 831.16

Made a risk-reducing play. I believe it is a bit early, but I rolled down the call spread by paying 55 cents for the 840/845/850C butterfly.

The delta of the short was moved from 24 to 14. That feels better. The driving force behind this trade i that I still fear the daily, steady market rally. At this level, even a small rally would have caused some pain.

Adjusted trade


10 am
I see that I ‘bought the top’ but am willing to live with that.

I raised the bid for the put spread to 10 cents and also entered an order to buy the call spread for 10 cents.

10:18 am
RUT is now down 6.50. If you held out and did not adjust, you get get out for a profit. To me that’s an excellent result for a potion that had a scare.

noon
Bidding $0.20 to close. Canceled individual 10 cent bids.

2:29 PM. Exit. Paid 20 cents for iron condor. Add that to the 55 cent cost to roll and we have 5 cents left. Not enough to pay the brokerage fee. Result: loss of roughly 3 cents, or $18.

3 Responses to “120312 Track that Trade: Weeklys options”


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