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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.

RUT Iron Condor trade for June

May 1, 2009
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I’m not a very regular Iron Condor trader. There was a time when I spent a lot of time doing credit spreads and condors. There is overwhelming logic in using these time selling strategies as you are more likely to make money without having to be as spot on with your trades as with simple long or short directional trading. Simply put, you can make money when the market goes two directions and to some extent three of the three possible directions the market can go. Ultimately, though, I found that despite the logic behind trading from that angle, it doesn’t suit me very well. The very argument for using them, that the probabilities are in your favor and time decay makes things better as the days pass, was also what seemed to consistently confuse my better judgment. Rather than strictly heeding my observations about significant breaks in technical levels and such, I would tend to give a position the benefit of the doubt and watch it slowly but surely get worse and worse. Anyone who trades spreads, knows that there is a point beyond which the Greeks can suddenly start putting the squeeze on your very fast. In short, for me personally, the strategy seemed to make me a bit lazy and over-confident. As most of you know, the trick with credit spreads is that while your win/loss ration should be higher, the profit/loss ratio will not be nearly as high as the potential with directional trading. So taking just that one or few big losses can drastically affect any profits you may already have.
Of course, I learned a lot from the experience and the time at it, and I don’t entirely avoid selling strategies. I am just a lot more selective about using them and try to keep a mind of the much bigger picture. At the moment, one of the things that strikes me is that while volatility has come down significantly from the panic highs of the last 9 months, it is still quite high compared to recent history. As a result, option premiums are still relatively high compared to the days when I was having such frustration with spread trading. Because of the high volatility, we can put on trades that are further away from the money and still find decent premiums to sell.
Take a look at the VIX.  It seems to me the most likely next move on the VIX is a pop higher, but until that happens, it is where it is. The 40 line seems a significant resistance level, we are below all the major MAs and the indicators don’t give much reason to expect a reversal.

Here’s a long term look. Barring some reason for another major panic, I don’t see why this should go back toward 50.

SO, after that long winded into, I’m looking to do a nice, simple far out of the money iron condor for June. One of the reasons I don’t like credit spreads is that you just have to wait and let the time decay do its thing. I’m a little too jumpy while watching the day to day fluctuations of stocks for spread trading stocks. But doing smaller positions on way OTM spreads on the indexes is a nice way to pick up some “easy” money. (Famous last words!)
I tend to stick to options on the Russell 2000, RUT, because it trades electronically and you are not subject to the guess work and luck involved with getting fills in the SPX pit with the open out cry that goes on there. Of course, we can always trade the SPY, QQQQ, IWM, etc., but then you have to trade many more contracts to equal the same money at work with the actual index options and that means more commissions. I know there are reasons that the TOS guys prefer those products anyway….better fills, tighter spreads, whatever. But this is just me.
I’m no Iron Condor expert, but one quick an dirty rule of thumb I’ve learned for the far out of the money IC approach is to sell the short strikes with a delta of around .10 or lower. When and if the delta on those strikes gets to .25 defensive action is needed. Either close out, roll further away, or add something like a calendar spread to balance out your deltas to a more comfortable level.

Here’s what I’ve come up with for RUT June contracts.

As a $10 wide spread, the margin requirement is $1000 for the trade. For every lot, the profit potential is $147 and the max loss potential is $853, not including commissions. Of course, this is using the data after the close on Friday, so it will surely change a bit on Monday morning.

Here’s the Risk Profile using TOS’s snazzy analyze page.
The Green line shows the p/l potential for the trade at expiration in June. The white line shows the theoretical value of the trade at any given price at the current date. As time goes one, it inches toward the green line. I have set price slices at the current price in the center, plus and minus 15% from the current price, and the break-even prices for the position. By adding the probability numbers in red toward the top, we can see that the probability is a bit over 60% that the RUT will be within the range of plus or minus 15% from the current price at June expiration. There is only a 19% chance that the RUT will be on either side of our break even points at expiration. As long as it stays between those two levels, in that big window of just over 210 points, we make money.

High Probability of success, which comes with a lower profit/loss potential. Makes sense.

Now for a look at the chart. We’re right now between the down-trending 200 MA and the 50 day which is turning upward. The 20 MA is below us and firmly headed upward. Considering the action in this area back in the fall, I don’t expect us to surge through here very easily, particularly after the strong run we’re had. Some consolidation or a reasonable pullback would be healthy. The MACD and Stochastic show potential for a bit of a pullback, but also no overwhelming signal for such. I would expect a pullback to no further than the 50 MA, currently at around 425.

Pretty cool how the strikes found with delta around .10 put our spread just outside of the high and low ends of the range from the panic in the fall.
Looks like a pretty good trade. And if you’re really feeling randy, one might try to put on the call spread now and give the index a few days or a week or so to come down some to put on the low side a little further away just for extra safety. This is probably what I will do in actuality.
Next time, I’ll show what I did for May on the RUT using this same basic approach.
Ciao for now.

GOLD long term entry? Day trade example.

April 23, 2009
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Quick look at Gold, long term.  I made a video but got rushed short by a phone call.   Nevertheless, I think you get the gist.  Here’s a link to the video.  http://screencast.com/t/Fcoam1Fo

Meanwhile, for those of you interested in the day trading side of things, I trade the /ES with some frequency.  It’s pretty tough, but I think it’s more about patience and discipline than anything else.  One thing I find very interesting and useful about it is that it shows you the very principles that you should apply to normal daily charts for your investing, but in very fast time.  So there’s lots of information to learn from in a much shorter time.  I can definitely say that it has brought my weaknesses and bad habits into focus and very quickly.

In any case, I don’t use anything fancy.  Same stuff as normal for daily charts.  The normal assortment of MAs, sometimes look at the MACD and Stochastics, but more than anything, Price action in terms of trend and support and resistance.  Patterns are just as useful here as on daily charts too, I find.

Here’s a nice setup from today’s midday action.  After trading down to slightly below yesterday’s lows, a sideways range was established and then it was broken to the upside.  Since it wasn’t on huge volume and in the snoozey noontime hour, I wasn’t all that convinced.  So I waited for a retest and took it.  VERY NICE!  I’m going to try to let it ride as long as it goes, but the absolute sell will be on two closes of the price below the 8 EMA on the 2 minute chart.

(Sorry, the sizing is a bit odd on this capture.  Click it to see it larger.)

Update:  Sold with a Stop sell order dragged up because of the double close below the 8 EMA on the 2 minute chart.

GOLD making the long term turn?

January 26, 2009
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I can’t blame you for if you’ve been sitting out of this market.  It’s been pretty brutal and even if the downward plunge of 2008 may be finding a footing, it has still been far from ideal for all but the short term traders.  But here’s something that even those solely longer term focused should be paying attention to.

Gold.  Long term chart shows a big flag pattern of sorts.  After pulling back above the 30 week MA some weeks ago, this past week marked what seems a quite significant break of the most pressing downtrending resistance.

Even on the daily chart, gold is uptrending for three months and recently gave three fresh green arrows for those who like that system. Volume on Friday’s break above horizontal and diagonal resistance was on very high volume.

The XAU does have long term resistance in the form of the underside of the old support from back in ’06/’07 and the support line from its bottom in October 2000. Nevertheless, like gold itself, the group shows three green arrows and a three month uptrend.

The Gold Market Vectors ETF, GDX, shows a very similar chart.

It is interesting to note that the Gold stocks have drastically underperformed the price of gold over the last year. Obviously, the entire stock market being hammered is a big factor in gold stocks being sold off. Nevertheless, the it would seem logical that if the price of gold moves significantly higher from here, the gold stocks could possibly rise even more so.

Here are a few strong looking stocks, particularly from the 3 green arrow perspective. They are in alphabetical order.

GG seems a favorite among talking heads on TV. Regardless, note the potential resistance here and the less impressive volume on Friday than some others.

KGC is under a significant resistance line that goes back to ’08 as resistance and support. What is interesting to me about this is that it has had very high volume for the entirety of last week. If gold and the group don’t follow through on the breakout higher, this one could be an interesting short.

Not surprisingly, Silver also had a big day on Friday.

Some silver stocks that look good.

Constructive charts.

January 9, 2009


AAPL is another symmetrical triangle.  I’m short this, so banking on the downside continuation.

Volatility contracting here with a likely break to the downside.

Rising wedge in a bigger down trend tends to resolve to the downside. A revisit to the rising 50 MA would be a more attractive entry to the long side.

Water utility stock breakout and new support test.

January 8, 2009

Here’s an ETF of Water Resources. Broke above resistance of a double bottom reversal but without major breakout volume.  Could be a “fakeout” but we’ll see if the line holds as new support.

Market Posture on a thin market

December 22, 2008

Well it does seem a bit moot to do all the active techicnal analysis on the current market. Since a few days back already, the volume has been drying up. High volume on friday, of course, due to “quadruple witching” day with all sort of contracts expiring. But as one of the TOS guys said on the friday market wrap, “After December expiration, the year is over.”

In any case, just so we keep our eye on the ball, here’s my take on the market posture. Seems we’re creeping sideways to up. Not reason to think that won’t continue in light volume unless something is broken drastically to the downside and the obviously red flag goes off.

I somehow can’t figure out how to imbed the video, but here’s the MARKET POSTURE VIDEO.

I’ll try to get back with some more charts to look at soon.