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BookingAlpha Option Trading Advisory

Monday, August 24, 2015

Adjusting Credit Put spreads on a Panic day (August 24, 2015)

That was my tweet today at exactly 9.30am New York time. The infamous Opening Bell.

I defended my two September positions as I said I would in the Defending Positions article on Friday
I'll just go over my plays as I published them on Twitter:

I also bought a December SPY 213 Call for 0.87 debit. Pure directional speculative play with very low risk.

As a result, these are my current positions:

September Positions (24 days to expiration)
RUT 900/910/1330/1340 unbalanced Iron Condor
SPX 1650/1675 credit Put spread

Rather than getting into all sorts of mathematical equations about my September losses, I will simply reflect final numbers here. You can always check out the track record for more details. These are the losses so far in the September expiration cycle:

And this is the credit collected in the existing September positions:
$75 RUT 1330/1340 Credit Call spread
$120 RUT 900/910 Credit Put spread
$150 SPX 1650/1675 Credit Put spread

Assuming that these September positions are successful in 24 days, the final result for the Model Portfolio in September would be:

+75 + 120 + 150 - 272 - 320 - 400 = -$647

That is a -5.42% draw-down on a starting balance of $11,928 which represented the +19.28% return of the portfolio at August expiration. Of course commissions also have to be taken into account, so the performance of the portfolio at September expiration would be +12.41% for the year. Again this is assuming that the current September positions expire as they are. For all the details of my September activity including links to the articles where each position was discussed visit the Track Record page

October Positions (52 days to expiration)
SPX 1700/1710/2195/2200 unbalanced Iron Condor.
I didn't have to trade any October position today.

December Positions (117 days to expiration)
SPY 213 Call.
Just a simple Out of the money Call. Sure, prices of options were inflated due to the high implied volatility but that is by far more exaggerated on the Put side. This is a pure lotto play betting on a rebound. I will not manage this trade. It can go to zero for all I care because it is less than 1% of the portfolio at risk. I'm looking to double or triple the debit I paid in order to get out. I don't need for SPY to rally up to 213. I just need it to rally enough so that I get some decent gain in the next 4 months. Just speculating on a meaningful rebound in a very oversold environment.

Events like today DO NOT HAPPEN that often. This is simply the price of doing business attempting to obtain out-sized returns on your money. Any strategy that attempts to obtain 20% yearly returns, 30% yearly returns comes with added risk. There is just no way around that. For the type of move that we just had, I am proud to limit the portfolio draw-down to no more than 6%. (Again, assuming we don't get another crash in the next 3 weeks).

Like I always say: Cheer up! Having first word problems is truly a wonderful thing. ...and I mean it with all my heart. We've been blessed.

Go to the bottom of this page in order to see the Legal Stuff


  1. I had to close out some losing positions today too. I have yet to deploy a lot of new cps positions yet to replace the ones that I closed. Probably will do it over the next few weeks. I am in no rush as volatility can be here for a while.

  2. I agree with you. This was an event that happens once every 3-7 years and is to be expected. VIX hit 54 which is the highest since the 2008 meltdown, I am trading a similar style and have a 6% drawdown as well so you have company :)
    I did estimate that 20% of positions should be losers so this is within the estimated loss ratio. The only question now is how far the slide will go? I decided to stay out till I see how bad Asia gets

    1. That sounds about right. I have made 33 individual trades this year and have 7 small losers. Keeping losses small will allow me to trade another day.

    2. Yeap, I agree with that number. It is what my track record reflects after 4 years. It also makes sense. If we open positions with 90% probability of success, we won't win 9 out of 10 times simply because we are willing to close for a loss once they reach 30% probability of in the money. Which means that the true probability of success for our plays is 100 - 30 = 70%. Then, given the fact that implied volatility is typically exaggerated we should expect to make a little better than 70%. So 80% sounds about right.

  3. Hi LT,

    I forgot to ask you why did you decided to sell a 25-wide spread instead of your usual 10-wide or 5-wide spreads?

    1. Nothing special my friend. Just liquidity. I was finding it impossible to get filled on 5 point wide spreads so I had to go to the most liquid strikes.

  4. Hi LT,

    I was facing the same Panic day in Asia, in particular KOSPI 200 Index Option in Korea Exchange. The biggest problem I had was the big bid/ask spread on this Panic day. There is no way I can ever get filled anywhere near mid price. The only way to fill (buy/sell) is to buy/sell at the bid/ask.

    Did you see an unusual big spread (bid/ask spread) in your SPX or RUT Iron Condor or Credit Spread? Was it possible to get filled around mid price? What was the typical bid/ask spread on such a panic day?

    1. Hi Tony,
      Yes it was very hard to get filled as liquidity dried up. Bid-Ask differential widened a lot especially during morning hours, things started to normalize later in the day.
      Most of us had to fight the whole day and be really patient. Basically all the trades you saw here took a while to get filled. Nothing got filled immediately. I supposed Asian markets were worse.