Closed SPX and RUT Iron Condors for August

Yes, I’ve filed for a divorce with high-probability trading, but there is the matter of leftover trades that must be dealt with. These are the last Iron Condors I’ll be doing for a while. The next one I do will be hatched under the roof of systems trading. You’ll see that I didn’t do what I said I was going to do with both these trades, and my assumptions about what the market was going to do for the next six weeks was completely wrong. I changed my mind as the market conditions changed, and in the mean time I endured the rather unpleasant emotions of dread, loathing, fear, resignation, hope, more dread and so on.

I put on the SPX Iron Condor trade for August at the strikes of 785/790 (puts) and 1010/1020 (calls). My credit was $1.15. You will notice that I skewed the trade towards the downside. My risk was greater on the upside ($10 on the call spread) than on the put side ($5 on the put side). The reason: I wasn’t too concerned about a rally, but more concerned about retesting the lows. Okay, you can laugh now.

I put on the RUT Iron Condor trade for August at the strikes of 450/460 (puts) and 560/570 (calls). Credit received was $3.15. My reasoning was that the market wasn’t going anywhere for a couple weeks, and I would take the trade off for a small profit with more than two weeks to expiration. Yes, you can continue to laugh.

If you trade with discretion, you really need to get past the fact that you will be wrong at times, sometimes dismally wrong. Discretionary traders who have been stung by wild market action that is in complete contradiction to their views tend to hedge their opinions going forward. I’m not going to make attempts to convince anyone that they should hedge their opinions in the market. Not because I’m concerned about you neophytes not listening to me, but only because it is completely worthless. Worthless because it takes personal experience to learn this lesson in trading, and good-intentioned words from others probably does more to hinder your development as a trader than help. Pay your own tuition. It’s the only way.

An Iron Condor is a hedged position by definition, because your further out strikes protect you from unlimited loss. The SPX trade this month had a total risk of $8.85 for a potential reward of $1.15. The RUT trade had a risk of $6.85 for a potential reward of $3.15. Not your typical positive expectancy scenario, but this is the strange world of options we’re talking about here.

Anyone following the market in the last few weeks would have observed that the SPX breached the short strike of 1010 and almost hit the hedge of 1020 intraday. In the RUT, the short strike of 560 was breached and the hedge of 570 was also breached as the index traded at 577 intraday. That’s enough to discourage just about anyone. It’s usually around the time when the price starts touching your short option that you begin devising ‘adjustment’ plans. You can move your short call spread up a strike by simply purchasing a like-option butterfly. For example, to move the RUT 560/570 call spread up to the 570/580 strikes (which gives you more breathing room), just buy the 560/570/580 call butterfly. Diagram it out on paper, it works.

Adjustments cost money though, and it doesn’t take long for you to become confused as to what you’re trying to accomplish. I chose not to make adjustments.

On Wednesday before expiration (tomorrow is the last day to trade AUG SPX and RUT options), I took the trades down. That is, I took off all the risk.

For RUT, I decided that buying the 500/560 AUG strangle was the best choice. It was marked around $4.20 before the open, but the futures were down so I put in a standing bid of $1.99. While I was buttering my toast, I heard the opening bell ring. Sauntering over to the monitor, I noticed that the order was not working, but was in fact filled. Holy smokes, that was fast! Okay, good. No risk is left and I have a small profit.

Next up the SPX Iron Condor. The strangle approach wasn’t working out so well. I had a bid for the 800/1010 strangle for $0.75 and when I saw it being marked at $0.62 after the open, I canceled and replaced it with a bid of $0.50. The spread got away from me and went to a $1.00. Now the sell-off from the close was getting challenged and that 1010 call was getting more expensive to buy back. The 800 put was going into no-bid land (zero bid, ask a nickel) where nobody wants to fill you. It was mucking it up. Another approach was to buy back my short 790 put for a nickel and work on the short 1010 call. And that’s what I did. Bought back the 790 put for $0.05.

I realize it’s hard to keep track of all this, but you will recall that though I neutralized my RUT Iron Condor (took off all risk), I still had long options, namely the 460 put (worth less than a nickel) and the 570 call (worth around $0.80). I was thinking of the long 570 call as a hedge against a melt-up on the markets and against my short 1010 call in SPX. Different markets, yes, but it helped me take a breath and consider an orderly exit strategy.

I bought back the SPX 1010 call for $0.90. That made the profit total $0.20. Big whipty do, I understand. But remember I was facing a loss of over $8.00 just last week. Now with my risk in SPX off, I sold the RUT 570 call for $0.65, and the long 1020 SPX call for $0.30.

After all was said and done, the profit from the SPX Iron Condor totaled $0.50, and the profit from the RUT Iron Condor totaled $1.81.

I was worried that when I announced my break-up with high-probability discretionary trading, she would sell my golf clubs to the punk kid next door for $20. But she hasn’t done that. Maybe she wants to get back together, who knows. You never can tell about these things.

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