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Much delayed May RUT Iron Condor

June 2, 2009

Hey there.

So sorry for slacking on my promised MAY RUT Iron Condor as mentioned in the previous post.  I’ve been sort of swamped and even went without my computer for a whole week while it was in the shop.  Talk about a HORRIBLE feeling.  Me no likey!

One annoying thing about my erratic life recently is that I didn’t manage to get on that RUT trade I so nicely planned out in the last post.  So far, it’s still looking good.  Pressure is on the call side, of course, but currently the Delta on the June 590 call is about .07, so as for the moment it still looks good.  The index will have to move about 40 points or so higher to get toward the Delta of .25 that warrants defensive action.  Meanwhile, the clock continues to tick, which helps by the day.

So here’s the quick and dirty on the MAY trade I made.  On April 9, I sold the May 550/560 call spread for $.82.

At the time, it had made a strong rally up to a likely resistance area and the MACD and Stochastics were flat-ish after the strong bullishness.  The options chain showed the May 550 with a delta of .10 or so, which is the top end of where you want to sell for this type of WAY out-of-the-money Iron Condor strategy.  On the chart, I saw three potential resistance lines in addition to the downtrending 200 MA over head, so it seemed a pretty reasonable choice.

For the put side, given the fast and steep rally from the March bottom, I was not comfortable putting on that side until waiting for a downdraft of some sort, particularly with five weeks left before expiration.  Even without a major downdraft, I figured I could get a put side on at a better price in the coming week with a new higher low. Alas, that didn’t quite present itself. As the index continued to climb, it became too late to put a bottom side on as the time premium had decayed further as well as the downside risk seeming more and more.  So I never got the put side on, unfortunately.

As for closing out the trade, the relentless climb seemed unstoppable. So with the time decay having done its thing, I decided to close it out early before some complete crazy surge took place. The delta was still okay, as I recall, but I was content to take it off and rid myself off the stress. I bought back half on 5/11 and the other half on 5/12 for a combined average price of $.13 per trade. A profit of $.69 is hardly an exciting gain, but its much preferred to seeing the potentially small profit turn into an even smaller one or even a loss.

I never got on the bottom side of the Iron Condor and took off the top side early when, of course, the next day the index was down would have made it easy to coast out the rest of the trade.  I could kick myself, but hindsight is always easy.
Let me emphasize, however, as I mentioned in the previous post, that I don’t rely on iron condors or spread selling for this account’s gains. This kind of half-application of the strategy would not make for a good year, I’m sure. At least, not a consistent one. But as I said, for some extra profits when it looks more than highly probable, I’m okay with a little bite here or there every now and again.
At the moment, I’m not all that eager to sell volatility. The VIX has come down quite an amazing amount. I figure a pop is inevitable sometime soon, even if it isn’t prolonged. As a result, I would think put Calendar spreads a more appealing strategy, as they benefit from a rise in volatility as well as the time decay. I think a Double diagonal could be a decent substitution for an Iron Condor for the same basic reason, but I don’t know if the experts would agree.

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