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Tuesday, June 23, 2015

August 2015 RUT unbalanced Iron Condor

Today I entered the first position of the August 2015 monthly options expiration cycle:


Trade Details:
Buy 2 August RUT 1150 Put @4.35
Sell 2 August RUT 1160 Put @4.95
Sell 1 August RUT 1350 Call @4.10
Buy 1 August RUT 1360 Call @2.76

Credit: 1.34 from the Call side, 0.60 from the Put side X 2. Total: $254
Max Risk: $746 on the upside, $1746 on the downside.
Days to expiration: 58

Complying with one of my cardinal rules on this play: never obtain less than .60 credit on a 10 point wide Put spread and never less than 1.00 on a 10 point wide Call spread. This doesn't feel like the most comfortable position in the world right now due to the low VIX that makes me get closer to the price action of the instrument. But, as I have pointed out before, nobody knows when the VIX will go up. For all we know we could be in a low VIX environment for one more month, or two, or an entire year like 2013, who knows. So, just keep it small and have a solid defense plan in mind just in case things need a little help down the road.

Alternatively I could have gone with the 1370/1380 on the Call side for 0.60 credit and fully balanced Iron Condor. I just happen to prefer the higher credit on the Call side and then half position size. If an adjustment is needed I will use normal position size on the adjusted Calls further up, which will allow me to mitigate the losses.

Here's the chart of the RUT index after market close today, June 23, 2015 for my own future reference and self study:

(Click on image to enlarge)
Current positions in the Portfolio:

July SPX 1935/1940/2220/2225 unbalanced Iron Condor 
$220 credit, 91% probability of success with only 23 days to expiration. Very likely to expire worthless without any problems.

August RUT 1150/1160/1350/1360 unbalanced Iron Condor
The trade discussed in this article.
$254 credit, 75% probability of success and 58 days to expiration

Check out 2015 Track record

Related Articles:
Weekend Portfolio Analysis (July 11, 2015)
Weekend Portfolio Analysis (July 18, 2015)
Weekend Portfolio Analysis (July 25, 2015)
Closed 1150/1160 Put side early for risk reduction (July 29, 2015)
Weekend Portfolio Analysis (August 2, 2015)
Weekend Portfolio Analysis (August 9, 2015)
Weekend Portfolio Analysis (August 16, 2015) 


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6 comments:

  1. "Complying with one of my cardinal rules on this play: never obtain less than .60 credit on a 10 point wide Put spread and never less than 1.00 on a 10 point wide Call spread."

    I have been a long-time reader but this is the first time I have heard you mentioned this rule. What is the rationale behind obtaining more credit on the call side than the put side?

    ReplyDelete
    Replies
    1. It is true that it is the first time that I mention it. But it's been a long time rule I've followed. The credit has to be there. My rule for 5 point wide spreads is .30 for the Put spreads at least and .50 for the call spreads at least. By the way this is all epxlained in the LT Options trading system at ltoptions.com

      The rationale is simple, a credit call spread that reaches 30% probability, and therefore according to my rules needs to be adjusted, is always more expensive than a 30% prob put spread. Therefore, by obtaining a larger credit initially, I compensate for the larger eventual loss on the Call side. Now, the new addition this year is to play unbalanced, further reducing Call side risk and this way I'm now totally indifferent about where the market is going to punish me. I don't care anymore if the market punishes me on the Call side or on the Put side, because in both cases my loss will be similar, and my final balance, with adjustment credit included is also similar regardless of where I was hit.

      The alternative to this is, of course, to obtain any credit on both sides and then always adjust at a given fixed % loss, like twice the credit received or something like that. For example selling 5 point wide Put spreads around 0.40 credit (this would be 12 or 13% prob. in the money) and adjusting them whenever they are worth 1.20 debit, regardless of the probabilities at that moment, while at the same time doing the same thing on the call side, 0.40 credit, which would be like 6 - 8% probability instead of the usual 10%, and then adjusting whenever they reach 1.20 debit again regardless of probabilities of the options at that point in time.

      Regards,
      LT

      Delete
    2. "The rationale is simple, a credit call spread that reaches 30% probability, and therefore according to my rules needs to be adjusted, is always more expensive than a 30% prob put spread. Therefore, by obtaining a larger credit initially, I compensate for the larger eventual loss on the Call side."

      Thanks for the explanation. It makes sense. I have not gotten that far in your excellent LT Options trading system.

      This is where our strategy differs a bit when adjusting the call side. When my call side reaches a delta of 30, I will close the existing iron condor and sell a new iron condor instead of just adjusting the call side.

      For example. Let say I have this August RUT 1160/1150 & 1350/1360 iron condor that I collected $2.00 credit. Let's pretend the short strike of the call side reaches a delta of 30 next week. I will close the whole Aug iron condor for $3.50 debit. My loss is now $1.50.

      I will sell a new September RUT iron condor with a delta of 10 on both legs for about $2.00 credit.

      Delete
    3. Yes, that's a valid alternative and I have applied it a couple of times over here (Rolling the entire Iron Condor when adjusting and not just the threatened side). I'm not totally against that approach and I will use it when I consider it safe. If I am hurt on the Call side, and the market is looking too over extended to the upside and with more than 3 or 4 weeks until expiration I will just roll the threatened Call side because at that point I'm trying to avoid getting whipsawed and hurt on the Put side as well if I move it up. But, if I feel we are not too extended on the way up, and perhaps there is little time to expiration, then I will consider rolling the entire thing in order to obtain new additional credit on the other side as well. Just one more tool on the toolbox.

      Cheers,
      LT

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    4. The idea in both our cases is to always give ourselves a chance to come out profitable or break even, even when the market hurts us once. If we get to achieve this we are well set. We should win 8 months out of twelve without adjustments at all. Then assuming 4 months go wrong, 3 of them will probably only need one adjustment so they would end up being break even months or even slightly profitable, and this would leave only one single month where we would be hurt twice on the same position resulting in an overall negative month. Those are really good odds for long term profitability in a sustainable and responsible fashion.

      LT

      Delete
    5. As you pointed out, adjustments are a necessary evil. I expect the market to have price swings and I choose strikes which I feel will not be affected by those price swings. That is why strike selection and time to expiration are so important to allow theta to counter delta as best as possible.

      Most credit spreads will work out if the trader will give it enough time and buffer. All you can do is trade what you see then adjust when you have to.

      I think we can formulate general guidelines and principles, but I encourage every trader doing this strategy or any strategy to learn to adapt when necessary and conform the rules to your own risk and trade management styles.

      I am quite happy day to day knowing I do not need to trade or stress. I simply watch the market and only jump in when one of my short strikes is close to being breached. All we can do is control our risk in whatever position we take.

      Delete