Track That Trade: March 25, 2013

8:40 am
SPX = 1563.
VIX = 12.89
Days: 53
Quantity 4-lots
Premium $1.90 [80 cents for calls; $1.10 for puts]
Delta: Short options each 13-delta.

SPX May 1440/1450P
SPX May 1625/1635C

Original Greeks (total for position):

    -8 Delta
    0 Gamma
    -132 Vega
    10 Theta

    NOTE: I made this trade in my real account.

Rationale for trade:
With markets generally headed higher, there is no reason to place a trade that is too close to the money. Iron condor traders have a feeling of comfort when markets are not volatile. However, non-volatile, unidirectional markets are even more dangerous for the iron condor trader. [Why? Low premium offers less reward potential, and larger maximum losses. I chose options far enough OTM that I feel comfortable owning the position. being neither bullish nor bearish, I do not have to be concerned with my own market bias]

In fact, I’d prefer to be just a bit farther OTM, especially on the call side. However, implied volatility (VIX) is near the lower end of its historical range. When that is combined with volatility skew (that just means that options with higher strike prices trade with lower implied volatility than options with lower strike prices), out-of-the-money call options trade with low IV. The options traded today have IV just over NINE. That is low.

When IV is low, OTM options do not carry a lot of premium, and moving even one strike farther OTM makes a significant difference in the premium that a seller receives. Thus, it was the 1625/1635 call spread or nothing for me. Another investor may have preferred the 1630/1640 call spread, collecting 15 to 20 cents less.

Trade Plan

The usual plan is to

    Hold an 8-week iron condor for 4-6 weeks
    Exit either side when it reaches 15 to 20 cents
    Adjust as necessary (more details coming if and when we think about an adjustment)
    Exit both sides if and when satisfied with profit.
    Establish a Flexible profit target

Profit target $1.20. Will take less if position becomes slightly worrisome.

Update April 1, 2013

No adjustments necessary.
View the 2-minute video (easier to see in ‘full screen’

Update April 3

This data is from 9:18 am CT

SPX, option delta, value of spread (profitable) highlighted in image.

Doing nicely. No action taken.

Any questions or comments?

Progress Report; April 8, 2013

SPX opened fairly flat this morning, and its value is 1552. That is an excellent location for out position. The short put has a 13 delta dnt eh call delta is 7. Very comfortable.

The position Greeks are unremarkable: Delta is -3, gamma 0, vega -113, and theta 17.

The bid/ask spreads are wide, but the asking price is $1.50 (one-lot is offered, according to Interactive Brokers), making the midpoint 75 cents. That feels too low. The market makers show this: 0.75 bid to 2.75 ask. Midpoint is $1.75.

No action taken.
The clock is doing its job this time.

Addendum: 12:53 pm CT
The iron condor market is now: $.75 to $1.60; midpoint = $1.17.
That is a very nice profit for such a short period of time.
Nevertheless, I am holding this trade. If the premium continues to shrink quickly, I will reconsider. The original trade plan calls for paying ~$0.70 to exit.

Commentary April 11, 2013

Market will close in 2 minutes, SPX is 1593.

Bidding 20 cents for put spread, offer is 60 cents.

Call spread is $2 bid; $3 ask.

Obviously we are losing money in this trade. However, it is not too bad and I do not feel the need for any adjustments. However, and this is important. f you are interested enough to be following this trade, then please feel free to comment. Would you have felt better to reduce risk? Are you okay with where we stand right now.

I’d love to hear from you.

Update April 12, 2013

It is 8:53 am and the market is erasing its opening decline.

SPX = 1589.
The short put has a delta of only (minus) 5, but I am bidding 20 cents for the put spread.

The trouble spot is the call position, being 36 points out of the money with a delta of 20.

With wide markets, it is not so easy to determine the cost to exit this trade, but the mid is $2.33 and I’m sure I could get out at $2.50 or perhaps $2.45.

I see no reason to take any action. Yes, the market has been moving higher in 2013, but that does not affect my decision. If we were bullish or if we were afraid of a big upside move, then this trade would never have been made in the first place. My mindset is that I cannot predict direction and am willing to own this position in appropriate (smaller than usual) size.

Greeks for total position:

    Delta: -20
    Gamma: 0
    Vega: -120
    Theta: 18

    I want to respond to this comment from 1Silverman: “With the price going higher by the day I would very concerned if I were in this trade. I would think that your MAX debit to exit is close.”

        I’d like to ask why you believe this position is near its maximum loss? I understand that SPX was 1597 (8 points higher) yesterday.

        Our plan did not specify an adjustment or exit point. And it should. As mentioned, the problem is that each of traders who follow this trade have a different exit point in mind. If you would like to respond with a specific delta, or specific price level that you would deem it wise to exit, please do.

        My situation is that I am still comfortable with this trade.

    No action taken.

Quick Update April 15, 2013

9:37 am.
SPX down 9 points to 1580.

Even with the recent decline, we are still delta short. The 1450 put carries a 6 delta and the 1625 has a 15 delta.

Cost to exit: Midpoint is $1.65.
To anyone who hates this position, it is time to take a small profit and quit.

I’m staying with this trade, so no action is being taken.

Update. April 17, 2013

9:08 am
SPX is 1558
For no other reason that the markets have become more volatile in recent days, I am entering an order to exit this iron condor.

My bid is 90 cents and the mid-point is $1.20.
I do not anticipate a fill, but it cannot hurt to have this order in place. It is good for the day (NOT GTC).

10:12 am

VIX = 17.78
Delta: calls: 7; puts: 14

SPX is now down more than 26 points on the day to 1548, and we can see the difficulty with trading SPX options.

The 1440/`450 put spread had a wide bid ask spread: 0.20 to $2.60. I know it is not representative of the true market becasue the bid ha not moved all day as the offer has risen by about $1.00. The cal spread remains where it was earlier in the day: $0.45 bid for one lot. No market maker will sell it (yet) and the offer remains at or near $0.70.

In other words, we do not truly know what is going on. The only way to know for certain is to enter an order. That is terribly inefficient.

The best I can do is get a quote for the whole iron condor. Currently that is $0.90 (that is our bid) to $2.80 ask. I am cancelling my bid just so that I can see the true market maker market, not that it will provide any useful information. Correct. The bid is far less than zero. So our best guess of the midpoint is 50% of the asking price, although it must be higher than that.

The short option remains 98 points OTM, so there is no need for an adjustment now.

Update April 19, 2013

2:12 PM
SPX = 1552.
Deltas: 11 (puts) and 5 (calls)

We can exit by paying $1.05. That offer has been visible all day.
However, I see no urgency and am bidding 85 cents.

This is no time to become complacent. I will not hold out, hoping to exit near zero. I would love to get of out this trade early,and will keep bidding.

2;38 pm.

Filled paid 85 cents.
Paid 60 cents for put spread and 25 cents for call spread.

For a trade that provided a small amount of nervousness on both the upside and downside, all came out well.
Profit $1.05 (on each of 4-lots), less ~$8 in commissions.

9 Responses to “Track That Trade: March 25, 2013”

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