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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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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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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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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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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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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5 mins from opening today and futures are pointing to a lower start. After a run like that on Tuesday, market definitely needs a breather. Wednesday was Bernanke’s

day. A day where whatever he said was digested, vomited, re-ingested, re-digested, re-vomited….I’m sure many would have liked a follow-through, but market doesn’t quite care what we like, does it? A lack of follow-through on Wednesday usually signals a short-term pull-back.

Those in my private mail-list would have opened an iron condor yesterday. Depending on when your trades were executed, and no thanks the bid-ask spread, most of us should show either a slight loss or breakeven. Bid-ask slippage, for those new to the game, is part and parcel of option trading.

From here on, we sit tight.

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