The markets calmed further today as the Saudis assured the world they would make up for any oil supply disruptions from Libya. Oil prices dropped to $97 and stock prices climbed modestly. The SPX gained $7 to close at $1327 and RUT rose $2 to close at $823. Volatility dropped to 18.4%. The Chicago PMI came in at 71.2, a 20 year record high. Pending home sales dropped 2.8% in January, but a decrease of 3.2% had been predicted by analysts. Trading volume increased from Friday with 3.3 billion shares of the S&P 500 trading, about 100 million shares below the 50 dma. Trading increased 17% on the NYSE and increased 8% on NASDAQ.

My Mar iron condor at 730/740 and 875/885 stands at a P/L of +$2,500 and delta = -$22 and theta = +$157 with 17 days to expiration. I was looking at the iron condors traded in this blog since June 2009 and the number of months where no adjustments were necessary stood out: only three out of 22 iron condor positions were established and closed for a gain without any hedging or rolling of spreads up or down. I position these condor positions where the probability of success is typically about 85% or better. One could draw the conclusion that 19 of the 22 positions (or 85%) should have been expected to have resulted in a profit without the need for any adjustment. But that would be naive on several levels.

The probability calculation I refer to is the probability of the spreads closing OTM, or worthless at expiration. If one had calculated the probability of one of the condor's spreads being ITM at any time before expiration, you would have been surprised by the results. The probability of the condor's spreads expiring OTM at expiration includes many events where one of the spreads moves ITM and then back OTM before expiration. Assuming you employ any kind of risk management, you are not going to sit by and watch the index move into or even past your spreads without taking action - that would be foolish and could be very expensive. So even if we were to assume that the calculated probabilities would always match trading reality (they won't but that is another topic of discussion), we will have to hedge or adjust our condor positions much more often than the calculated probabilities would suggest. Thus, a robust system of risk management is not just a good idea; it is essential for your trading success.