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Saturday, September 11, 2010

Trading an Iron Condor position in XAU

Hello lazy traders,

I recently put on an Iron Condor position (paper trading) on XAU (Phlx Glod/Silver Sector) where I really like my odds. Usually Iron Condor players only aim for a 10% return on investment or something like that, sometimes even less. Sorry guys, but not worth my time. It just doesn't work for me.

This position was open on September 8th, and looks like this

Bought 10 OCT 175 PUT @ $2.55 (-) 
Sold 10 OCT 180 PUT @ $3.80 (+) 
Sold 10 OCT 192.5 CALL @ $5.50 (+)
Bought 10 OCT 197.5 CALL @ $3.60 (-)

This gives us a nice credit of $3.15 ($3150 for 10 contracts) which we would cash if XAU stays in our expected range (see pic bellow) and a risk of $1.85 ($1850 for ten contracts).
The break even point to the downside is reached if XAU hits $176.85 whereas to the upside is at $195.66.

(Click on image to enlarge)

So, a theoretical 170% Return on Margin at expiration date (Oct 16, 2010). Of course, this is just in theory, the odds of either one of the break even points being reached are high, and also this position shouldn't be hold until expiration.

By looking at the one year chart of XAU, we can see that our upside break even point ($195.66) was last breached on December 2, 2009. So, I like my upside room at this point. As for the downside ($176.85) It can be reached. Don't get me wrong both points can be broken here. In fact, most likely one of them will be broken. But the beauty of the position is that we have received a lot of credit, which will allow us to make adjustments later on, and that is really when the game is won. If there is a fast movement towards any direction any time soon we will be adjusting with another Iron Condor, or closing the affected vertical and selling another one more out of the money. If the position is threatened in two weeks or beyond we will probably want to adjust with a double calendar or a double diagonal by them, it depends on the volatility by that time as well.

Have fun!!!

Follow this trade, Taking care of our Iron Condor (September 14,2010)

Follow this trade, Adjusting the Iron Condor (September 16, 2010)

Follow this trade, The Perfect parasite (September 21, 2010)

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