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Our June iron condor at 410/420 and 560/570 on the RUT (Russell 2000 index) is in good shape; today's slight bearish move strengthened its position. Our $570 strikes are now > 2 standard deviations out of the money (OTM).
We also established an iron condor in July today on RUT at 460/470 for $1.45 and 560/570 for $1.85. It is a 20 contract position, so the total credit is $6,600 and the capital at risk is $13,400. The risk/reward ratio of this condor is much smaller than the one above, closer to 2:1. This is a somewhat tighter position, with each spread inside of one standard deviation. We will target to only be in this position for about two weeks. Our breakevens are at $467 and $563, but we will close the trade well before reaching those points. We will close the spreads on a side when the debit to close either is twice the original credit or when we can close the spread for less than half the original credit.
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The RUT index closed today at $526.08 with IV = $33.43%. With 7 days remaining to June expiration, one standard deviation = $24. Therefore, our $570 calls are 1.8 std. dev. from the current index price and the $420 puts are 4.4 std. dev. away. Since our last blog on Tuesday, the markets have basically traded sideways. Our condor is in excellent position, with nearly two standard deviations of safety margin on the call side and over four standard deviations on the put side. I like this position because my fear continues to be for another downside drop in the market (I just don't see any encouraging economic news) and we have plenty of room on that side. My normal rules for closing my condors are to close on either the Friday or the Monday before expiration if the short strikes are within two standard deviations of the index. In a case like this one, I will watch the call spreads closely; given that we are at 1.8 standard deviations today, I probably won't consider closing these until Monday at the earliest. If you are more conservative, I recommend you simply close on the Friday before expiration (tomorrow). I use the two standard deviation rule because I hate to give away those last few hundred dollars in time value and commissions and I think this is a reasonable level of safety margin. But expiration week can be very volatile, so watch your positions very carefully if you choose to take them into next week.
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Now that we have closed our iron butterfly, let's check on an iron condor on RUT we started on May 1 with June options and 48 days to expiration. We sold 20 contracts of the 380/390 put spread for $0.90 and the 570/580 call spread for $1.05, for a total credit of $3,900. By May 8, the RUT had traded upward strongly, so we closed our 380/390 puts for $0.55 (net profit of $700), waited a couple of days and sold the 410/420 put spread for $0.90 on May 11. On May 18 I added two calendars to boost the theta for this position and reduce the negative vega typical of condors: 10 contracts of the Jun/Jul 480 put calendar at $8.55 and 10 contracts of the 500 call calendar at $7.95. However, IV has been gradually falling and this hurts our calendars, so I closed the call calendars on May 28 for $8.40, a gain of $450, and closed the put calendars on June 3 for $8.30 for a $250 loss. So as of today, this position stands well inside positive territory and our theta decay is just under $200/day. However, if the RUT continues its upward climb, we will close the call spreads early. The delta of the 570 calls is 12 this morning. We won't allow that to exceed 18.
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A few minutes before the market closed today, the RUT index stood at $529.61 and IV = $34.92%. Based on 9 days to June expiration, one standard deviation = $28. Therefore, our $570 calls are 1.4 std. dev. from the current index price and the $420 puts are 3.8 std. dev. away. Bottom line: our condor is in good shape. As time marches on, that $570 short strike is becoming more and more unattainable. Stay tuned.
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To my surprise, the market shrugged off GM's bankruptcy and soared upward from the open this morning. So I was forced to close my iron butterfly before I lost all of the gains we had built over the past couple of weeks. I closed the trade for $20.31 as RUT was passing $513 on the way up. This resulted in a net gain of $1,470 or 6.3%. It was disappointing to give up a portion of the profits we had last week, but the key is to follow your rules and get out when you said you would - don't second guess yourself; follow the rules.
