In the last post, I mentioned that "a pull-back at this point towards the underside of the wedge would make a nice lower-risk set-up for a short". Sure looks like the SPX is doing just that ! See chart :

While the SPX can continue to challenge this rising trend-line, a drop that breaches both the recent low, as well as a close below the 30 day SMA will really confirm a downtrend. This may happen over a few sessions. If that happens, we may not see 1300 for a long time. I know of some aggressive traders that will take position here with a close stop above 1303 or a slightly further stop at 1315. But that’s not us ! We take trades that have very high probability of success, specifically iron condors.

Let us see what this week brings…

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Market Situation

It doesn’t look good !

Recall we talked about the "rising wedge" (see post) ? We mentioned that chances are high that it would result in the continuation to the downside. Well, on Monday, the

pattern showed its hands by breaching the lower trend-line for the first time since mid-July (see chart). There was follow-through on Tuesday, bringing the SPX down to a low of 1263. It however closed at 1267, right at the 30 SMA. The rebound yesterday was technical in nature. A pull-back at this point towards the underside of the wedge would make a nice lower-risk set-up for a short. A close below the 30 day SMA would confirm the start of a bigger downward move.

Our September Iron Condor

Both our Bull Put Spread and Bear Call Spread are doing great.

The Call side at 1385/1410 was sold last week for a credit of 1.65. Yesterday, it closed at a marked price of 0.375. We have a GTC order to close the position at 0.20. May happen today.

The Put side at 1150/1125 was sold for a credit of $1.50 per spread. Yesterday’s closing price was 0.95. Delta has gone back down to 7. Unless we get very big moves to the downside, we don’t anticipate having to adjust this position. However, our bearish view of the market may make us close this out earlier than 0.20.

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We are a little late this month and it has resulted in lower credits.

On Wednesday (13 August 2008), we opened a Bull Put Spread at 1150/1125 for a credit of 1.50. Specifically, we sold the SPX September 1150 Put and bought the SPX September 1125 Put for a net credit of $1.50 per spread. Margin requirement was $2,350.

Today, we took the plunge and opened the call side. While I expect the SPX to reach the upper trendline at about 1320, when we get there is another question. And if I wait till Monday next week, we would only be about 30 days away from expiry. Furthermore, failure to reach the upper trend-line would lead to a breakdown and an accelerated descent. We opened the Bear Call Spread at 1385/1410 or slightly more than one standard deviation away. Specifically, we sold the SPX September 1385 Call and bought the SPX September 1410 Call for a net credit of 1.65. Delta was at about 9 when we put in the trade. Margin requirement is $2,335 but since we have the Bull Put Spread opened already, the margin of the entire iron condor remains at $2,350.

If both spreads expire worthless come 18th September, maximum return of 13.40% would be achieved.

Attached below is the risk profile of the September Iron Condor.

September Iron Condor Risk Profile

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The SPX has been confined to a congestion for the past 20 odd trading sessions, forming what chartist like to call a rising wedge. Sudden big up day followed by big down day is typical during periods of consolidation. The big question is what will

result from this type of consolidation? Well, the rising wedge has long been recognized as a continuation chart pattern. Since the longer term trend is down, the more likely tendency is a break to the downside. Yesterday, SPX recorded a low of 1274 which touched the lower trendline of the rising wedge. A close below 1274 would violate the wedge and will likely bring the SPX lower towards the July low.

Today is the last trading day for our expiring option spread. Feels like pay day to me. Both our Bear Call and Bull Put spreads should safely cross the finish line, barring something catastrophic. But do remember, while we can trade the spreads the whole of today, whether any August options go in-the-money or not depends on Friday’s open.

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Looks like August is kind enough to give us our 16%!

Our Bear Call Spread was under threat over the weekend and on Monday. The SPX registered a high of 1313, just 17 points short of our short call at 1330. I did not check the delta at that point (I don’t watch the market all the time!) but I do recall that it was 18 at one point in the day. Yesterday’s 15 point in the SPX drop brought us a great deal of relief. Delta has dropped to 5 and the spread is now worth 0.40.  Futures indicate a negative opening. I will not be closing the position, though it will help release the margin for our September trades. Our Bull Put Spread is 104 points away at this juncture and will expire worthless.

Market opens in 10 minutes….

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SPX Action This Week

11 more days to go till August expiry of our index options, counting from Monday, that is. This week, the SPX made several big moves, both on the downside and the

upside. On Monday, it declined a hefty 23 points to 1234. The bear camp, with myself included, brought out the champaign and exchanged sighs of relief from last weeks apparent bullishness. Even before we could finish counting the gains, Tuesday’s about-turn wiped out all of Mondays progress (downwards). And then some. It closed Tuesday at 1263, higher than where it started on Monday. This was followed through on Wednesday, where we really had to begin plans on adjustments. It reached a high of 1284, 7 points short of last week’s high of 1291. That area would have been congested with every Tom, Dick and Harry’s stop loss order. A breach would have easily propelled it past 1300, and initiated our dreaded adjustments. Delta of our short call (August 1330 Call) hit 19. VIX touched a low of 20.99. Thursday and Friday retreat brought the SPX back below the 30 SMA.

Our August Option Spreads

Both spreads of our August Iron Condor are looking great. First, the excitement this past week rooting for the Bear Call Spread. Our August 1330/1355 BCS closed the week at a marked price of 0.575, having rosed to over 3.00 per spread. Time decay as well as the drop on Thursday and Friday eroded the price, while delta dropped to 5. IV for near-the-money call closed the week at 20.56. Currently, we have a buffer of 70 points from our short call.

Our Bull Put Spread is virtually untouchable. Recall we sold the August 1100/1075 Put at 2.00. On Friday, it closed at a marked price of 0.10, and a delta of 2. Currently, the short put is 160 points away. We should be able to let that expire worthless.

Attached the risk profile of this iron condor for reference.

New Position

On Friday, we opened new position, taking advantage of the increased IV. We opened a Bull Put Spread at 1175/1150 (sold August SPX 1175 Put/ bought August SPX 1150 Put) for a net credit of 1.10. Currently delta is at 8 with 9 trading days to go. The short Put is deliberately set at slightly more than 1.5 standard deviation away.

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