Track That Trade. 111027. Iron Condor. My Trading Approach

Please check out this morning’s blog post. It includes some background about this trade.

My goal for this trade is to produce something that I am trading for my own account. I’ll make the trade, sharing decisions. I’ll mention alternatives. If my philosophy becomes relevant, I’ll add a discussion of that.

The underlying

I want to quit trading so much RUT because of how volatile it is. I’d be happier with the new SPXPM options. These are SPX options that settle at the close, rather than at the day’s opening prices. However, my broker is not able to supply the Greeks or any risk analysis for these options. Thus, for this trade, I’ll be using RUT options

Expiration Month

December. I prefer Jan, but as mentioned, I prefer to eliminate RUT from my portfolio. November has far too little time remaining for my more conservative approach.

The Trade

RUT Dec 640/650P;840/850C iron condor. $2.50 credit. Two lots. [Strikes corrected: Hat Tip to Kim]

Please let me know whether you can/cannot see video.
I suggest the full screen version.

Full Screen Video

Philosophy Tidbit

I believe iron condor trading can be very rewarding when practiced with discipline. I neither seek, nor will I accept the high risk/high reward that comes with trading Weeklys. I also avoid front-month options. Not being greedy is my motto. I encourage that way of thinking, but how much risk to take is surely an individual decision.

Oct 31

RUT is down 16 points near the end of trading. The current price is 745.
If we look at the delta of our short options, the put carries a 17 delta and the call, only 10.

We are not neutral, but both our short puts and calls are still 95 points OTM and there is no need to take any action.

Nov 1

It is 11:17 am and RUT has declined to 717, down another 23 points.

Market quotes for Nov 1; 11:17 am

Nov 1, 2011. 11:17 am CT

Note that the Greeks are very close to neutral. Do not let that fool you. This is only a 2-lot trade, and the Greeks won’t get too large. It’s important to measure risk by looking at the graph.

The delta of the short call is less than 7.
The delta of the short put is 23.

This trade is far from neutral, but once again, this trade must be judged by our individual comfort zones, and I see no need to do anything when the short delta is only 23. Some traders (those who prefer high delta, CTM, iron condors) may consider selling this put spread when opening a new trade. I don;t want to do that, but I see no reason to cover or make any other adjustment.

If you feel differently, please leave a comment.

Update: Nov 15, 2011

The market has been up and down, but this position is still far enough OTM to not present any problems.

Our short options:
Dec 650 put: delta = 16
Dec 840 call: delta = 4

I’ve entered a bid to cover the RUT Dec 840/850 call spread. The bid is 20 cents. I feel no urgency to bid a higher prices. However, this is a personal choice and if you want to bid a little more – or even a little less – those are reasonable alternatives. My advice is to enter a bid.

I see no reason to take any other action. Thus, for now we are holding onto this trade.

Nov 15. 8:31 am CT

Nov 18 Update

I covered the 840/850 call spread. [Let’s assume I was a tad aggressive and paid 25 cents. My usual bid for this spread, in this situation is 20 cents.]

I am not going to sell another call spread. This is a personal decision. The trader has two choices:

  • Sell a new spread
  • Don’t sell a new spread

When we fail to sell another call spread, we are accepting a position that is now bullish in that we are short one OTM put spread. We could sell another spread to do two things: bring in more cash and reduce the positive delta position.

There are two basic problems.

The first is that there is not that much time remaining before the December options expire (4 weeks). To get any significant cash, we would have to sell a spread that is not that far OTM.

That’s the second problem: For me, that is simply too much risk. Why own a not-too-far-OTM call spread when we safely covered the call portion of the trade. I do not want to get hurt if the markets decides to soot higher. If you are someone who prefers to sell a replacement call spread, my suggestion is to sell fewer spreads than you sold previously. In this example, we only sold two lots. However, if you typically sell 10, then I suggest trading only 5 or 6 new spreads (if you feel it is better to sell).

Delta neutral

If we were committed to delta-neutral trading, then selling more calls would be appropriate. However, I am committed to making money, and I know that selling a call spread does offer much risk reduction for out residual position.

Our decision becomes when to exit the put spread.

Update Nov 20. 9:30 am

RUT is below 704, or. down 15+ points on the day

We can still exit near $2.00. That’s good for us. Any uncomfortable trader can exit (delta of 650 put is 24) and the same price as our last update.

I’m holding this trade. It’s a front month position, so we must be more careful about getting careless or complacent. If we drop further, the position will begin to lose money quickly (see graph). It’s not a large sum because this is a 2-lot. Do not allow that to affect your decisions. It’s not the dollar total that should matter, but the dollar total when compared with the maximum loss. This 2-lot spread can cost us up to $1,000 to exit. We must not allow the cost to approach that number.

Nov 20. 9:30 AM

Nov 20 9:30 am Risk Graph

Update Nov 23

RUT currently 677, down 20 today.

The put spread can be covered at ~3.10.
The short delta is 34.

Nothing done today.

Update Nov 30, 2011

9AM RUT + 28 points to 722. The image below was taken earlier.

We are looking good, having taken the precaution of covering the call spread earlier.

Nov30 morning

Decision: With one side covered, how much to pay for the remaining side?
I tend to bid my ‘usual’ 20 cents, but it is reasonable to pay as much as the trader is willing to pay. I have no specific recommendation, but 60 cents is about as high as I am willing to go.

I am NOT entering a bid today. At least not yet.

EXIT. Dec 2, 2011

In a situation such as this:

  • Good profit
  • Options far OTM

deciding when to exit is a very personal choice. I often hold out for my ‘low’ price of 15 to 25 cents (varies by time remaining to expiration). For December options, that would be $0.15.

However, I am very willing to pay up a nickel or two when the trade increases my available margin and I have a new position that I want to open. When both of those conditions are not met, I am less anxious to exit.

Thus, I am calling this position closed, based on the fact that the market is opening higher this morning. As far as a learning experience is concerned, this trade is ended. If I had an account with almost zero downsides risk, I’d hold out for that low price level. However, most iron condor traders always have some reasonable risk in both directions, and I don’t want to suggest how your comfort zone is affected by this residual trade. For the purposes of this TTT example, I’ll enter a bid to exit this trade – it will be a LIMIT ORDER.

Update, after opening:

Never mind. At 50 cents bid, I’m not going to play. I’ll bid 25 cents and see what happens. But as mentioned, the educational value of this trade is complete.

27 Responses to “Track That Trade. 111027. Iron Condor. My Trading Approach”

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