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BookingAlpha Option Trading Advisory

Saturday, April 12, 2014

April RUT Iron Condor - Second adjustment

It really really sucks to have both sides of an Iron Condor threatened in the same expiration cycle. And that's exactly what happened to me with the April RUT 1020/1030/1245/1255 Iron Condor. I opened that trade back in February 24. RUT closed at 1174 that day. By March 5 RUT had rallied up to a high of 1212 and looked unstoppable. Still not close to my 1245 short Call, but because there was so much time to expiration, the 1245 short Call was showing a 30% probability of being in the money (roughly 30 deltas) and I adjusted the whole position further up to 1080/1090/1280/1290. What really sucks is that I adjusted right at the top,....RUT started to definitely go south after my adjustment. If only I had a CNBC Guru's crystal ball, I wouldn't have rolled.

Then it all looked good until RUT corrected almost 7% just from April 2 to April 11. For Christ's sake.
Now I had to protect the 1080/1090 Put side which hit the 30% probability of expiring in the money. So, this was the trade yesterday:

Bought to Close 3 RUT 1090 April Put @6.90
Sold to Close 3 RUT April 1080 Put @4.80
Net debit: 2.10

I originally received 0.60 of credit for this spread. Closing it for 2.10 debit represents a loss of 1.50, or $450 in 3 contracts per leg.

I adjusted further down as follows:
Sell 6 RUT 1060 April Put @2.25
Buy 6 RUT 1055 April Put @1.85
Net Credit 0.40 ($240 in 6 contracts per leg)
Notice the 5 point difference in the strikes of this new spread vs the 10 point difference in the original one)

Because of this trade, April will be a negative month. No salvation.

So, what was the mistake here?
Well, you could say it was adjusting the original 1020/1030/1245/1255. I would be sitting on a perfect position now. But actually I don't think adjusting that original Iron Condor was a mistake. By adjusting I minimize the size of the losses. Yes, they will be more frequent but smaller. Rolling up the 1245/1255 after the 30% probability of being in the money was hit was the right move for me. I know I'll have more losers throughout the year, but I know my equity curve will be smooth and losers will be smaller. So, I'm fine with that, moving the 1245/1255 up to 1280/1290 was the right move back then.

My real mistake was rolling the 1020/1030 Put side up to 1080/1090. It was not a mistake because it ended up being a loser. It was a mistake because I totally went against my rules there.

When the market meets my definition of overbought, my rule is to never roll up a Credit Put spread. Well, I was absorbed by the herd mentality and the thought that the market was unstoppable and headed to the moon. Wrong! Wrong, again not because the trade turned out to be a loser, but wrong simply because I violated one of the rules of my system based on emotions. I knew I rolled that put spread out of emotions and that I was not following my system. Had I left the 1020/1030 side untouched, my final Iron Condor would have been 1020/1030/1280/1290, a sure winner at this point, and the April expiration cycle would have still been a positive cycle. That's the lesson right there: Not to roll the untested side when the markets are at an extreme. Crystal clear and nothing new. Just that emotions sometimes get in the way even though you have been doing this for 3 or 4 years.

Anyways, it is not the end of the world. If the adjustments are successful, the final balance for April will be roughly -3.5% when considering commissions. And while losses suck, It feels good that having an Iron Condor tested twice in the same expiration cycle will only cost a -3.5% draw-down to the overall portfolio. That's not bad. Two Iron Condor losses the same month, and only a -3.5% per cent loss for the portfolio.

My final position is now 1055/1060/1280/1290 with 6 days to expiration and a total credit of $520.

RUT's definitely my papi. It dominates me, I have to admit it. The wild beast that I can't ride. Looking at my track record it is clearly visible, not just this year, that RUT is not my game. I do way better trading SPX and SPY. So, maybe, just maybe, the Lazy Trader will become even more boring in the near future and will only concentrate on SPX or the corresponding ETF SPY when liquidity becomes a pain in the ......

Check out 2014 Track Record

Related Articles:
Weekend Portfolio Analysis (April 12, 2014)
Iron Condor expires worthless on April 18, 2014 

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1 comment:

  1. You know 20/20 is hindsight. I also thought we were clearly going to 1950 on SPX and 1250 on RUT last month. I was wrong. 1900 is proving to be quite a strong resistance for this market.

    In the heat of the battle, we will make mistakes based on emotions. Our greed or fear takes over and we make irrational mistakes that we end up regretting. You violated your rule by rolling the safe side up based on your thinking at the time we were heading to the moon. I closed my Mar bear call spreads for a loss thinking the same thing. We were both wrong since that was the top.

    Looking back now, it was an overbought market but we remembered what happened last year. Markets don't have memories but traders do. We remembered how overbought it got in 2013 and stayed overbought for a long time. So you adjusting the put side seemed like the right thing at the time.

    My rule is to give my spreads a bit more room than you. I am comfortable adjust at delta of 40. This means I will adjust less but have a bigger debit when I do adjust since I waited too long.

    Another thing you could have done was to add more contracts to your bear call spreads when you made the adjustment so that the debit is not too large. This will have kept you from trying to make up the credit on the good side. We have seen how Adam done it successfully with his put strategy.

    If I was in the same shoes like you yesterday, I might not have closed the 1090/1080 position since we are clearly oversold. But assuming I did close it, I would not have opened another April put spread since it is only one week to expiration. I would have sold a June 950/940 and double down on that position. I could have probably collected .80 per contract for the 950/940 yesterday. I would feel better with a June position than a weekly position.

    But saying all that, I think your April put spread position is very safe at this point. 1100 will prove to be support for this market. I think selling will abate next week.

    Regarding RUT, we know it is going to be more volatile than SPX since it comprised of 2000 small companies and have a big proportion of biotech stocks. Instead of doing an iron condor on RUT, just wait for your signals to tell you when it is overbought or oversold and sell spreads accordingly. Or you can use Adam's strategy and sell only bull put spreads. Currently, he has the April 1075/1070 credit put spread and he has not adjusted yet.

    I know a guy who only sell spreads on SPX with good result. For me, I like to have 2 or 3 indices to sell. IWM, SPY and QQQ.