Months from now, we’ll look back and proudly say we survived September 08. Having a trade on this month does give one some boasting rights. Coming out from it unscathed deserves a beer.

Iron condor can be very nasty strategy to trade when things turn volatile, like during a 60 points 5% drop. The drop in index coupled with an IV spike can quickly turn a profitable position to a losing one. Our bullish put was in trouble the morning of the drop (15 Sep 2008), rising from 0.30 the previous day to a morning high of 2.50. We managed to close the trade at 1.80 on a retracement.

Our Bear Call Puts spread was closed 3 days later at 0.20.

Our October Iron Condor yielded a profit of 1.15 (1.70+1.45-1.80-0.20) or 5.2%

Better luck next month !

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As mentioned in the last post, our October Iron Condor is as follows:

Bear Call Spread

Our October Bear Call Spread was opened on the 3rd September at 1385/ 1410 (specifically sold SPX October 1385 Call and bought SPX October 1410 Call) for a net credit of $1.70. The SPX was hovering around 1272 and IV was at 21. Delta of the short call was at 9. We took the trade with a view that the index was more likely to fail at the 30 day SMA and drop significantly. We were rewarded with an almost 40 points drop the next day.

Bull Put Spread

The put side of the Iron Condor was established on the 5th September at 1075/ 1050 (specifically sold SPX October 1075 Put and bought SPX October 1050 Put) for a net credit of $1.45. SPX was at 1233 with delta of the short put at 8). VIX had shot up to above 24 after several sessions of selling and a short term bottom was very likely.

Current Status

The big drop yesterday was huge. On the chart, the red candle is bigger than any in recent months. It dropped a total of 43 points, similar to the drop on the 6th of June. It was good that we put on the 2 spreads separately, thus extending the distance apart to 310 (1385-1075). Had we established the 2 spreads together, they would most likely be 200 odds points apart, like our iron condors in the past months.The Bull Put Spread would definitely be threatened and the spread would almost certainly show losses, though unrealised. At present, while SPX is at 1230, the Bear Call Spread is marked at 0.475 and the Bull Put Spread is marked at 1.30, both positive.

The Risk Profile of the October position is below:

October Iron Condor Risk Profile

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While I was right about the down move (see previous post "Kiss of Death"), the sad thing is that I did not fully capitalise on it. When I first began to trade options many years ago, I remember an often-asked question : "Would you want to be right or would you want to make money?" To many being right and making money are both the same thing. Well, not quite true. Being right answers to yourself and specifically to your ego. Being profitable answers to your bank (or trading) account. We know traders who are right less than half the time and yet very profitable. Conversely, we come across those that are right most of the time, but lose money.

When the SPX broke the rising wedge, I was aware that probability was high that a down move would result. After the breach, the index consolidated beneath the rising wedge and above the 30 day MA. In the process, it visited 1300 twice. While at 1300, VIX hovered below 20. My point is that it was a great time to close out our September Bull Put Spreads which were trading around $0.30 - $0.40. Instead, we did nothing. Yesterday, that omission came back to haunt us, by rising to over $2.10 per contract. While delta was manageable at 13, it remains a threat. To think that I even mentioned closing it in an earlier post (see post "September Iron Condor Update"). I quote myself : "However, our bearish view of the market may make us close this out earlier than 0.20"

So where do we go from here?

We expect some retracement before the bears mount another assault. Yesterday was a reversal day which may bring the SPX up to the 1260 - 1263 area. A 50% retracement will see resistance at 1283 area. We will likely increase our Bear Call Spreads then.

Next post, we’ll talk about our October iron condor position that has already been opened. For those following closely, we opened the Bear Call Spread at 1385/1410 when SPX was at 1272 (credit $1.70) and the Bull Put Spread at 1075/1050 yesterday (credit $1.45).

More details and risk profile soon.

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