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The markets continue to teeter on the edge; the SPX and RUT both appeared to be pulling back from resistance levels set in early June, but reversed course mid-day and closed near where they opened, with minimal net change. My positions are hedged against further upside movement, so I am simply waiting for the market to decide whether it will break resistance and set new highs or pull back.
My iron butterfly stands at P/L of -$797, delta = -$47, and theta = +$75; my breakeven on the upside is $542, so I have some room for this position to be profitable and a reasonable positive theta while I wait for the market to choose a direction.
My Aug iron condor stands at a P/L = -$740, delta = -$37, and theta = +$37. This is a minimal theta/delta ratio of 1:1, but the long Sept $530 calls have me effectively hedged up to about RUT = $540, so I can patiently wait.
At this point, either the market breaks to the upside and I close my positions for minimized losses due to the adjustments, or the market pulls back and I have the opportunity for these positions to play out for a profit. The adjustments allow me to patiently wait rather than trying to predict the market and hope I am right.
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The markets gapped up at the open and ran up, but then gave back all of those gains and appeared to be meandering sideways most of the day. The major indexes are flirting with the resistance levels set back in June (about $950 on SPX and $535 on RUT). By mid-day, I was thinking it may be time to sell the long September calls that are protecting my condor's call spreads; the thought was to take that profit today and wait for the RUT to drop tomorrow and then my condor would be back in good shape. But during the last hour of trading today, the RUT and SPX both started strengthening and even more so after 4 pm ET. That tells me some big money is expecting the market to push through these resistance levels. RUT closed at $526.96, just below resistance, and SPX closed at $951.13, right at resistance.
I decided it was better to leave my upside protection in place. The risk/reward curves for the next day or two are essentially flat with my Sept calls in place, i.e., I can afford to allow the RUT to continue upward to about $550 and my position P/L should remain contained to a loss of less than about $2000 (less than an average month's gain). The Aug condor stands at a P/L of -$880, delta = -$28 and theta = +$45. This is a weak theta position, although it is still positive. Clearly, this position is at the "fish or cut bait" stage - in the next few days, we will either close our call spreads or sell our Sept calls (or both).
My Aug iron butterfly now stands at a position delta of -$48 and theta = +$71. This theta/delta ratio is better, but nothing to write home about. To varying degrees, both of these positions are on the edge of being closed if this market continues its strong surge upward.
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Confidence in the economy continues to grow and feed the rally in the markets. The Russell 2000 Index (RUT) closed up at $522.02, surpassing the recent high of $520 on July 1, and closing in on the high of $535 set June 5. I began hedging my Aug iron butterfly at 440/490 and 510/560 by rolling one of the pairs of spreads up one strike to 450/500 and 520/570 (closing one contract of the call spreads and one contract of the put spreads and opening new spreads one strike upward). This moderated the delta somewhat to -$69 with theta = +$68. I am not optimistic that RUT will break this next resistance level, so I didn't roll more than one strike upward. If I am wrong, then I will either roll further upward or close the trade.
My Aug iron condor stands at a P/L of -$880 with a delta = -$61 and a positive theta of $44. Our Sept $530 calls are effectively holding our losses in check, but our theta position is deteriorating. If theta goes negative or RUT breaks $535, I will close this position for a loss.
Note that hedging our position does not turn the trade into a winner, but it holds our losses to a reasonable number (our goal with the condor is to hold our loss to less than the original credit of $4,000, and buy us time for the market to pull back).
Losses are a necessary part of trading; learning the techniques to control and minimize the loss allows you to stay in business.
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As I watched the market basically trade downward and sideways most of the morning, I was somewhat encouraged (because that favors my current positions). But, as the day wore on, the market struck me as holding up pretty well on increased volume. Thus, I re-evaluated my positions.
Around mid-day, my iron butterfly stood at a delta = -$69 and theta = +$72 - a pretty weak position. If RUT moves up only $1, I stand to lose all of the money I gain in one day from time decay. That's too much price risk, so I closed my two remaining $510 calls for $23.31 and sold two $530 calls for $12.51. By not rolling the long $560 calls upward, I reduced my upside profit potential but I also reduced my upside risk substantially. So the iron butterfly position now looks like this: one $520/$570 call spread, two $530/$560 call spreads, two $440/$490 put spreads and one $450/$500 put spread with a position delta of -$29 and theta = +$71. So I am back in my comfort zone of about a two to one theta/delta ratio.
My Aug iron condor is also hanging off the edge of the cliff, hedged by the long Sept $530 calls, but theta had deteriorated to low levels and I decided to make further adjustments rather than expose myself to any more risk. I closed 10 contracts of the $530/$540 calls for $4.10 and sold 10 contracts of the $570/$580 calls for $0.70, for a net $3.40 debit or $3,400. This boosted our theta back up to +$53 and reduced the position delta to -$14. At this point, my adjustments have greatly reduced my profit potential for this position, but I have also reduced my loss potential dramatically.
For those of you new to options spread trading, don't despair. You can start small, use simpler adjustments and build your experience over time. Understanding the various risk management techniques is crucial to successful options trading.
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The market took off to the races today, buoyed by Intel's better than expected earnings announcement and favorable forecast for the third quarter. The FOMC minutes from June were released and the committee thinks the economy will be shrinking slower than previously expected - that's good news? The volatility of this market continues to amaze me. One day, it's doom and gloom and the next day everyone is optimistic and buying across the board. The RUT gapped open this morning and raced up over $19 to close at $515.64.
My iron butterfly is starting to feel the heat with a position delta of -$63 and theta = +$50; the break-even is $533. I set it up this way because we have resistance levels at $520 and $535.
My Aug condor is also feeling the strain. I purchased an additional Sept $530 call for $14.90 today. The position stands at a P/L of -$190, delta = -$59 and theta = +$50. Those September calls are minimizing our loss while enabling us to see if the RUT will break resistance at $520 and $535 before we "throw in the towel".
