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The sellers returned to the markets this morning and spurned the good news of lower initial unemployment claims and lower continuing unemployment claims. However, the decline in existing home sales took the market by surprise and that may have accelerated profit taking. RUT dropped about $12 to $602 and the SPX dropped about $10 to $1050; both indexes are well above their nearest support levels, so I think the bullish bias to this market continues. All of the major indexes traded down all morning, but then strengthened a bit in the last hour of trading.
I established the call spreads for my Nov iron condor this morning as the market was dropping, selling 20 contracts of the Nov 680/690 calls for $0.86. I then watched to see if the buyers would come back into the market, and when that happened late in the day, I sold 20 contracts of the 500/510 puts for $0.87. The range for plus or minus one standard deviation was $538 to $664. My resulting position is somewhat bearish with a delta = -$21 and +$75 in theta. IV is skewed with a value of about 39% for my 500/510 puts versus about 24% for the 680/690 calls. If I had placed my put spreads closer to one standard deviation OTM, my short puts would have been starting out with pretty high deltas around 15-16, meaning I would be adjusting the position with only a small move downward in RUT tomorrow. Thus, I ended up with a bearish leaning condor even though I ideally wanted it to be delta neutral.
In the meantime, this downward move of the past couple of days has positioned my Oct condor nearly delta neutral at +$15 with a large positive theta of $106. However, this position is still well underwater at about -$1,200 because our adjustments have reduced our profit potential and we need a lot of time decay to get us into the black.
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The markets were buoyed by the FOMC announcement this afternoon. The Fed reiterated its observations that economic activity has improved, but, perhaps more importantly, said they intend to leave the fed funds rate at very low levels for some extended period of time to stimulate the economy. That boosted the markets. But it didn't last long before profit taking ensued. However, look at the charts. Both RUT and SPX simply closed down at the bottom of the consolidating range of the past few sessions. Therefore, there is no sign of a correction or change in trend direction here as yet.
This sideways and now slightly downward trading has been helpful for my Oct iron condor. The delta of my short $660 calls had dropped back to 14 this morning (closed at 12), so I sold my Nov $640 call for $16.10 ($450 gain). The position now stands at a P/L of -$1,385, delta = -$40 and theta = +$115. Our theta/delta ratio is back to a healthy neighborhood, but our wounded condor only has a maximum profit potential of $745 at this point. He's limping with 22 days to go. But trading the iron condor successfully is all about salvage operations - if you can salvage a small gain or even a small loss in the "bad" months, and take the gains in the "good" months, you can trade this strategy profitably. The key is learning to consistently manage the risk.
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The markets were generally under selling pressure most of the day with few exceptions in the biotechnology area. This isn't too surprising given the strength of the upward moves over the past couple of weeks. RUT closed at $616 and SPX closed at $1065, both a long ways from their nearest support levels. That suggests to me that the basic bullish character of the market has not changed; it is just pausing and consolidating a bit.
My Oct iron condor is basically unchanged at a P/L of -$1,285, delta = -$25 and theta = +$99. I'm just sitting on the fence here; if the RUT trades upward, I'll close the remaining 640/650 calls and sell my long Nov 640 call. If it trades sideways or downward, the position will strengthen and I will sell the Nov call when it starts to lose money. It may be a little boring, but most of the time is spent waiting on time decay when you trade income generation strategies. The trick is to watch it closely so that you adjust promptly when needed, but don't get impatient and trade just out of boredom.
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Today's market traded generally sideways to slightly higher. All of the broad indexes closed modestly higher, but off of their intraday highs. The pattern continues to look like a classic consolidation or base formation after a strong run upward. What should be encouraging to the bulls is the fact that whenever the market has shown any weakness intraday for the past several sessions, the buyers have returned to the table and held the broad market averages near their highs for the year. RUT closed at $621 while SPX closed at $1072.
I find it ironic (and a bit frustrating) that I have positioned my condors with extra safety margin to the downside for the past several months (negative delta), but my threats have come from the top side! I think I will position Nov with a delta neutral posture - the charts and technical indicators are pretty consistently bullish, but my emotions still worry about the other shoe dropping on the economy.
I closed the remaining eight $640/$650 call spreads this morning in my Oct iron condor. I paid $2.70 to close them and waited until the market ran up a bit this afternoon before rolling those eight contracts up to $660/$670 for $1.25. I still have the Nov $640 call hedging my top side. My short $660 calls have a delta of 16, so I still need that hedge. I considered adding one more long call today, but it would have reduced my position theta too much. At the close, the Oct condor stood at a P/L of -$1,685, position delta of -$16, and position theta = +$96.
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Today's S&P quarterly rebalancing and quadruple witching options expiration stimulated a high volume trading day (over 2 billion shares traded on the NYSE) but the markets didn't really do much - mostly choppy, sideways trading. The Russell 2000 Index settled at $617.54 and closed today at $617.88. That translated to very little change for my Oct iron condor with a net P/L of -$1,631, position delta of -$25 and position theta of +$83. My Nov $630 call is hedging my remaining seven Oct 640/650 call spreads. If the RUT trades higher, I'll close or roll the remaining 640/650 calls; sideways or downward action may allow me to minimize the damage. Next week, I will start to look at establishing some November positions. A side note: RUT's implied volatility has been steadily declining since mid-June (as any of you who have been trading calendar spreads are painfully aware); it is now down to 27%, a 52 week low. That translates to my either having to accept smaller credits for my iron condors or making it necessary to choose strikes that are closer to the index price. Of course, if you position your strikes based on a standard deviation calculation, that includes that adjustment. But declining IV helps my wounded Oct iron condor.
