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BookingAlpha Option Trading Advisory

Thursday, August 20, 2015

RUT unbalanced Iron Condor adjustment

Today I had to defend the Put side of the September RUT 1120/1130/1330/1340 unbalanced Iron Condor as the RUT index fell by 2.53%. Boy what a difference a day makes.

Trade Details
Buy to Close 2 September RUT 1130 Put @13.46
Sell to Close 2 September RUT 1120 Put @11.30

Net Debit: 2.16 ($432 for 2 contracts per leg)

I initially obtained 0.80 credit ($160) for these spreads back on July the 22nd as I sold the 1130 strike for 6.10 and bought the 1120 strike at a price of 5.30 for protection (to remove the unlimited downside risk)

Paying $432 debit today in order to protect myself from the apocalypse results in a $272 loss ($160 initial credit - $432 debit paid today for closing). This is officially the first losing trade of the year folks. It was a good ride but it was eventually going to end.

Of course this loss is mitigated by the fact that the Call side (1330/1340) of the Iron Condor is now a sure winner (+$75) which decreases the loss in the whole position to just $197 (272 - 75). In addition to this, I deployed new capital in RUT to re-establish the Iron Condor at safer strike prices and collect new credit:

Sell to Open 2 September RUT 1060 Put @4.05
Buy to Open 2 September RUT 1050 Put @3.45
Credit: 0.60 ($120)
Days to Expiration: 29

If this new Credit Put spread ($120 credit) ends up being a winner, then the loss is reduced even further: 160 - 432 + 75 + 120 = -$77. Had I originally played this Iron Condor as a balanced one (same number of Calls spreads as Put spreads) then that additional credit from the Calls that I don't have today would mitigate this loss even more. Talk about risk mitigation and this is without doubling down on my new Puts position (to collect even more credit), as I don't want to increase my risk and prefer to take it easy for rest of the year. Only time will tell if this new 1050/1060 Credit Put spread is as safe as I think it is. Here's how the new Iron Condor looks:

(Click on image to enlarge)

Here's the chart of the RUT index after market close today, August 20, 2015 for my own future reference and self study:

(Click on image to enlarge)
The Russell Index clearly breaking below the lower end of the down trend channel and now getting close to the lower end of the longer term uptrend channel. That could be support tomorrow.

Current positions in the Portfolio:

Tomorrow is expiration day and two positions in the August cycle are going to yield max profit: RUT 1350/1360 Credit Call Spread and SPX 1925/1930 Credit Put Spread. Between the two it will be a +$254 gain for the portfolio which will help combat today's loss even more.

Apart from that, we have:
October SPX 1890/1895/2195/2200 unbalanced Iron Condor
$220 credit, 8 weeks to expiration. This position was started only two days ago. Lots of baby-sitting ahead.


September RUT 1050/1060/1330/1340 unbalanced Iron Condor
The Russell Iron Condor after today's adjustment

Plan going forward
We are quickly reaching extreme pessimistic levels. With today's action we are very likely to see lower prices tomorrow (After a -2% day, where the candle closes near the low of the day there is usually high probability of seeing lower prices the next day, at least on an intra-day basis). We could reach the extreme conditions that I usually look for when attacking via Credit Put spreads. Right now the September SPX 1855 Put has a 10% probability of expiring in the money. That's pretty far from the current value of 2035. If the market keeps falling tomorrow, that 10% probability number may go down to 1840, 1835 or even 1825. A play down there, only 4 weeks away form expiration would be really attractive to me in order to collect new credits.

Folks, with this loss today I think I might owe a few guys some beers.

Check out 2015 Track record

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


  1. I admire your discipline. You are following your system to the letter. Today we had an oversold condition on SPX and RUT. Just because it is oversold does not mean it can't go lower. I did take the opportunity to sell some credit put spreads today. I will be looking to sell some spreads for the Fund if we approach 1150 on RUT and 2000 on SPX.

    1. Thanks Jonathan.
      I guess it is an undesired evil. I still had 40 something points to my short strike, but taking small losses is preferable to me than waiting for price to be closer to my strike prices. Most options sellers wait until price is 10 points or 5 points away. By then the loss starts to become significant. Obviously, they give their trades more time to recover and be right so the typical credit spread trader playing by those rules will have fewer losing trades. But draw-downs will be more significant when they happen.

      Curious about when you would adjust any of your existing positions.

    2. I will hedge when delta is 20 and close when delta is 30. I will hedge by buying a debit spread using up to 50% of the credit that I received for the position.

    3. Right. You have already explain that in the past. Thanks. Your positions look good.

  2. LT, what is your reason for not rolling down the 1330/1340 CS in order to get more credit? I understand there is always the chance of the market rebounding; but are there scenarios where you will roll down the calls for more credit? The vol is high now so call premium would also be rich.

    1. Hey Andrew,
      I just try to avoid getting a double whammy later on the Call side. Market rebounds tend to happen violently during pessimistic extremes, unlike overbought conditions which are more resilient to go down and take longer.
      I just didn't want to overcomplicate it and I'm fine taking a small loss.

  3. Good job for following your discipline!


  4. Today, near the close I sold an SPX Strangle:
    1800 Put / 2170 Call @ $21.20 credit

    I also sold SVXY puts.