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Broad market gains characterized today's trading. The jobs
report this morning wasn't stellar, but the traders appear to have concluded
that the worst of the economic problems are behind us; thus all news is being
given favorable interpretation, supporting the thesis that we have hit bottom and good times are ahead. But don't get complacent - that can change in a
flash.
The RUT closed at $572.40, up over $14. Of course, this large upward
move pushed my wounded Aug iron condor back into a precarious situation with
the position P/L up to -$2,410, delta = -$86 and theta = +$96. Time remaining
is down to two weeks, and normally I would be more comfortable with a $20 gap
to my short strikes at this point. But this market can cover that distance in a morning! So I
will be watching this position closely.
I had planned to put on my Sept iron condors today, but I had a full day and had to defer that to Monday.
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The markets opened up strong this morning in spite of lackluster employment data, but the bears took control and drove the SPX back under the key $1000 support level. RUT closed at $557.62, near its support level at $551. But the market averages are still up for the week, so this is nothing more than a healthy slow down after a strong run (so far).
This pullback in RUT helped my Aug iron condor at a P/L of -$1,870, delta = -$38, and theta = +$116. Theta/delta is at a healthy 3:1 ratio, and the P/L is moderating. My short $590 calls now stand about one standard deviation OTM. A little more pullback in RUT will tempt me to add some 590/600 call spreads to try to squeeze a profit out of this crazy month; but that will increase my price risk and we only have two weeks left.
Let's talk about hindsight in trading for a moment. The pullback of the last two days has been enough to have brought my Aug iron butterfly back into the range of profitability if it were still open. Looking back at closed trades and thinking about how much money I could have made is not healthy for my trading. However, reviewing old trades with the objective of improving one's trading is very beneficial. I keep a trading journal and review my trades at the end of each month. I categorize the trades that lost money into two camps: 1) Bad Trades, and 2) Losing Trades. If I broke one or more of my trading rules, that was a Bad Trade; if I followed my rules but still lost money, that is simply a losing trade - it is part of the overhead of the trading business. I will always have losing trades; the key is to minimize those losses. Spending time each month reviewing your closed trades will make you a better trader.
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Today was another volatile day in the markets, trading strongly upward for most of the day and then surrendering much of those gains in the afternoon, only to trade back up, with RUT closing at $570.74, near the day's high of $572. This is an amazing run - almost a perfect string of upward moves from July 10 to today, nearly a 20% increase in the Russell 2000 index.
By noon, I had decided my August iron butterfly had run its course. I closed the 560/620 call spreads for $17.61, the 570/610 calls for $12.84, the 470/520 puts for $1.30, and the 480/530 puts for $2.05, resulting in a net loss of $4,210 or 24% on capital at risk. The original maximum profit for this position was $6,975; I would have expected to realize about half of that as a potential gain, so this loss is a little larger than I would consider ideal (I try to hold losses to less than a normal month's profit in that strategy). As you will recall from my blog last Friday, I knew that last adjustment was a borderline move, but I was willing to take the additional risk to give the market a few more days to pull back. But this market is just not looking back.
My Aug iron condor is still in play, but I closed the 10 contracts of the 570/580 calls today. I left the Sept $530 call in play to protect the remaining 10 contracts of the 590/600 calls. At this point, the best I can expect will be a breakeven or a small loss after commissions. Current position P/L = -$2,325, delta = +$5, and theta = +$97. Our theta/delta ratio is now healthy, but our short $590 calls have a delta of 27, so we are not out of the woods yet. The important point to note is how I have hedged my upside risk with the Sept calls, rolled spreads upward, and closed spreads as the market has continued to rally. The net result is that our worst case scenario would involve a loss of about half of a normal month's profit. Risk management is essential to successfully trading the iron condor (and any other option strategy for that matter).
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The markets generally traded lower today, with the exception of the financial stocks. But significant support levels such as the SPX's $1000 level held up, so the market uptrend is still a force to be reckoned with. While bears tried to drive the averages down today, they couldn't hold the lows of the day and that shows the strength of the bullish case for this market. Given that the ADP payroll report and other economic news today was weak to outright negative, this support is significant.
The RUT closed down at $565.99. The delta of my short $590 calls in my August iron condor dipped down to 19 today, so I sold my Sept $530 call for $40.80, a $3,120 gain (my insurance). Thus, my condor position now stands at a P/L of -$2,590, delta = -$57, and theta = +$139. Time to expiration is diminishing (now 15 days), and that helps dilute the effect of additional moves against my position. But my 590/600 call spreads remain in a precarious situation. I cannot tolerate much of an upward move in RUT. At this point, my condor is a loser; I just have not confirmed the amount of that loss. My condor is unbalanced at this point with ten 590/600 call spreads and twenty 480/490 put spreads. I considered selling ten 610/620 call spreads today, but the credits were too small (ca. $0.40). I then considered additional 590/600 spreads but the resulting position delta would be around -$138 with about +$210 theta - nice bump in theta, but too much price risk. That addition would have restored the possibility of a net gain for this condor position, but I decided the risk wasn't justified. My dad was a serious poker player and he often said, "don't throw good money after bad", meaning don't add money to the pot after your probabilities of success have dropped.
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The SPX closed at $1002.63 today, the first time above $1000 since last November. RUT is also in new territory at $565.78, although it broke its November highs Friday. Favorable manufacturing index and construction spending reports this morning resulted in steadily bullish trading throughout the day, pushing all of the indexes to new highs on increased volume.
These persistent new highs are taking their toll on my August positions. My Aug iron butterfly, that I just adjusted on Friday, is already on the ropes, with P/L = -$3,420, delta = -$131, and theta = +$164. My Aug iron condor now stands at P/L = -$1,340, delta = -$104, and theta = +$116. Both positions are near my minimum of 1:1 for the theta/delta ratio. Unless we get some sideways or downward market moves soon, I will be closing both of these positions. But I will most likely be closing both positions for less than a normal month's gains - that is one of my iron clad rules. In fact, I nearly closed these positions today, but the relatively large theta values are keeping me in the trade for another day.
