Let’s do a quick update before market opens.

In the last post, I mentioned "the Jan 28 and Feb 9 double-top forms the next resistance in the 870 area". Yesterday’s big drop shows that the overbought market has decided to that a breather (more like a big sigh!).

Our positions are looking a lot better after that drop. Going into last weekend, the delta of the bear call (940/965) closed at 18 and the spread price was marked at 3.30. While it did not trigger our adjustment, I was already looking for adjustment candidates on Sunday evening. The drop has brought delta to a safe 7 and price of the spread to 1.20. Recall we sold our 940/965 at $2.00 per spread (see post).

The Bull Put Spreads are also looking good. The 655/630 BPS are currently marked at 0.35. Recall we sold each spread at $1.90.

Next update will hopefully see both sides closed.

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Just a quick note to say that ‘Yes, I am alive!’

Also, an apology to the regular readers for the sudden 6 months sabbathical. It has been a rather eventful 6 months for me. 4 of those months were spent conducting courses for a group of private investors-turned-traders.

I have kept those in my mail-list informed of all the positions taken these few months. I will also begin posting trades here, now that I have a bit more time.

Here are the trades taken last week:

SPX May 655/630 Bull Put Spread for $1.90
SPX May 940/965 Bear Call Spread for $2.00

Risk Profile

With Friday’s close at 842, the short call of our Bear Call Spread has reached a delta of 18. The SPX is now overbought. But as most of us know, it can remain overbought for a while more. The down slope trendline offers the 1st resistance at 852 while the Jan 28 and Feb 9 double-top forms the next resistance in the 870 area. With ADX  falling to the 20s, the uptrend may end at either of the 2 resistances. Presently, I am not too worried.

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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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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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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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