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Another big down day for the indices, with SPX dropping a whopping 23 points!

Technically, the SPX made an attempt at the 30 SMA and failed and has dropped almost 60 points in 3 days. Right now, it may find support on the downtrend line formed since early May (see chart). A bounce here, and a thrust higher will form a higher low, which would bode well for the SPX and for the market as a whole. A failure here may find the SPX breach 1200.

What about our positions? In short, they look great !

First, our Bear Call Spread at 1330/1355. We sold the August SPX 1330 Call and bought the August 1355 Call for a net credit of $1.50. Yesterday’s drop has made that spread drop to about 0.425 (mark). It would have been lower if not for the rising IV (now at about 23). Delta has also dropped to a safe 4. At this moment, with 16 days left to expiry, the short call at 1330 is almost 1.5 standard deviations away. We will continue to hold this and possibly let it expire worthless (yippee).

Next, our Bull Put Spread. It seems like a really long time ago when we opened this position. We initiated this spread on the 7th July, about 38 days from expiry. So much has happened since! The index reached for the skies and fell like a rock! At one point, the short put was almost 200 points (190 to be exact) from the market. Should we have closed it then? Well maybe, but I wanted it to expire worthless. By the way, that position was opened for a net credit of $2.00. Currently it is marked at $0.60.

If the entire iron condor expires worthless, our return this month would be 16.3% (nice). Let’s see how this pans out.

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Boy, what a ride up! The SPX rocketed over 90 points in just 6 trading days! We generally put in our spreads about a hundred points out based on current IV and usually about 50 plus days before expiry. 90 points in 1 direction in 6 trading days is not what we bargain for. We are glad that when the 1330/1355 Bear Call Spread was initiated, we decided to go more than 1 standard deviation out.

Anyway, our 1330/1335 position was threatened, to say the least. SPX went as high

as 1291 on Wednesday, 39 points away from our short call at 1330. Delta shot up to an intraday of 22 before closing at 20. The drop yesterday was a welcome relief. The trading session saw the SPX drop about 30 points from Wednesday’s close of 1282 and about 40 points from Wednesday’s intraday high. We have now a 78 points buffer while delta has dropped to 9.

Technically, SPX seemed to find resistance at the 30 day moving average (see chart). It managed to penetrate the moving average intraday but failed to close above it. Until that happens, our stance is still bearish, while not excluding possible bear market rallies, like the very strong one we’ve just had.

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This has been a tough month for most types of option trading strategies, with the possible exception of being long puts. Even that has its moments, with the kind of intra-day swings we have been experiencing. The market is oversold and yet the rallys wouldn’t stick. Not sure if the one in progress now will. But we don’t want to be around to find out.

With 2 and half days to go, and a relief rally in progress, I bought back the 1180/1150 Bull Put Spread for a debit of 0.70 (recall we sold this spread for a credit of 1.70). With that gone, we no longer have any risk to the downside, and lots to the upside (except for August 1100/1075 position). Market can now proceed with its descent, for all I care!

With this rally, I am also adding more Bear Call Spreads. Specifically, I am selling the SPX 1330/1355 Bear Call Spread (sell SPX 1330 Call, buy SPX 1355 Call). Credit obtained $1.50 per spread. At this moment, IV for front month is 32.30, short call delta is at 9 and short call is 102 points away.

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On Monday, we established the put side of the iron condor for August by selling Bull Put Spread at 1100/1075 (sold SPX August 1100 Put ($7.20) / bought SPX August 1075 Put ($5.20)). This was done for a net credit of $2.00. Recall that our Bear Call

Spread was opened for a credit of $1.70. This makes this months total credit $3.70 per iron condor. If the spreads were to expire worthless in 36 days time, returns will be 17% ($370/$2130).

While the call side was slightly more than 1 standard deviation away at the point it was executed, the put side was placed further from harm’s way - at more than 1.5 standard deviations away from 1262. This was done considering the current market. At the time of this post, the short call has a delta of 3 and the short put a delta of 6. Front month ATM IV is at 21.42. August iron condor has started out well.

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The long weekend gave us some breather - both for our positions and for ourselves. This isn’t exactly the best time to be trading iron condors. It was stressful, but I always emphasize that if done correctly, iron condors can have very minimal losses.

The drop this month made us do a costly adjustment, which thankfully was nullified with more credits from the opening of 3 more spreads (see post). Last week also saw us opening our August position. We managed to open the Bear Call Spread at 1400/1425 (sold SPX August 1400 Call, bought SPX August 1425 Call) for a credit of $1.70. We did not manage to fill the Bull Put Spread which we were asking for $2.00. Maybe today.

Futures point to a positive opening, but only barely. A bounce is due and I will not be surprised if we get a 200 point gain on the Dow. Let’s see what Mr Market feels today…

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The inevitable confronts us again. With yesterday’s drop of 38 points on the SPX, our Bull Put Spread short leg of 1240 comes within a stone’s throw of SPX’s closing of 1283. To be exact, a 43 points away with 20 days to go. Delta reached an unbearable 27. Several options came to mind, but these were taken.

The 1240/1210 Bull Put Spread was bought back at a debit of $6.00 per spread. In detail, the SPX July 1240 Put was bought for a debit of $13.50, while the SPX July 1210 Put was sold for 7.50. Net debit was $6.00, effectively closing the position initiated on the 3rd June 2008. See this post. Recall the spread was opened for a credit of $2.00. Net loss for the spread is $4.00 and net loss for the entire iron condor is $2.20 (the Bear Call Spread was closed for a gain of $1.80). See this post.

Next, I opened a Bull Put Spread at 1180/1150 for a credit of $1.75 (Sold SPX July 1180 Put and bought SPX July 1150 Put). I then opened 2 times as many Bear Call Spread at 1370/1395 for a credit of $1.00 per contract (Sold SPX July 1370 Call and bought SPX July 1395 Call). Net profit for entire position so far is $1.95 ($1.75 + 2 x $1.00 - $1.80). Additional margin required per allocation is $2400.

Hope we don’t have to do further adjustments this month.

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Closed the call spread of the SPX Iron Condor for $0.20. If a bounce takes place next week, we may take in some more credit by selling some call options, but time is running out. We have about 25 days left till expiry and there isn’t much premium left

unless we take more risk. I’ve grown a bit risk adverse and it is also not what this site is about. We’ll see next week. However, we may want to take some money in if we need to adjust the put side of the trade. With the 24 points drop, our put spreads are starting to hurt. I foresee if we hit 1300 in a hurry, say next 2 - 3 trading days, we’ll need to do some adjustments. I hope 1300 holds, but market doesn’t care what I hope for.

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The bull put spread leg of this month’s Iron Condor was established on the 3rd June at 1240/1210. SPX was trading at 1374. Credit per contract - $200.

Technically, I was expecting some support in the 1370 - 1375 region. In fact, the SPX managed to bounce off this support for the next 2 days, with an impressive 26 points gain on the 2nd day. It managed to close over the 30 day SMA. Unfortunately, it was the kiss of death. We’ve not even been close since. At its low of 1331, our Bull Put Spread was trading at $4 and a delta of 18.

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Last Thursday (29 May 2008), I initiated the Bear Call Spread of the Iron Condor for a credit of $200 per contract. As you know, I like to leg in one spread at a time. Just to be clear, I submitted the BCS as a complete order - I did not leg in the 2 parts of the spread. I used to leg into a spread when I was younger, and it was quite rewarding, at times. I shall share with you the method I used to leg into a spread on a rainy day (rainy day = a day where I get writer’s block). Back to the Iron Condor…

It was about 50 days out and a vertical spread of 1495/1520 yielded a credit of $200. That day saw the SPX hit a high of 1406. The trade was probably executed when it breached 1400. I’m not certain as

I was watching TV at the time. That’s the wonderful thing about doing option spreads in general and iron condor’s in particular. You do your homework half an hour before market opens, put in the trade and walk away.
Any way, some rationale for the trade. SPX breached the 30D SMA to the downside for the first time since mid-April. Prior to that, it fell through the trendline that had been established since March. Stochastics was oversold and I waited for a retracement to put in the spread. The timing was also right - 45 - 55 days from expiry. After the trade, the SPX went over the 30D SMA and spent a day there before coming down hard.

I could have been wrong and the SPX could have surged higher. But it did not matter. Iron Condors are non-directional. My technical analysis simply helped me maximize my credit, and hopefully result in a shorter duration winning trade.

The spread at 1495/1520 was more than 1 standard deviations away. Delta was 9 when I took the trade.

The Bull Put Spread was established on the 3rd June 2008 at 1240/1210, for a credit of $200 per contract.

More about the BPS in the next post.

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