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December 26, 2012

SPX Dec'4 Bull Put spread

  • Sell Dec'4 1390 Put
  • Buy Dec'4 1385 Put
  • Credit: .30¢
  • Margin: $4.70
  • ROR: 6.38%
  • Fills: .30¢ credit
Risk Profile:

12/28/12 Update:
This credit spread expired worthless, we kept full credit or 6.38% Return on margin.

December 19, 2012

Know when to roll

When trading Iron Condors, you are selling 2 spreads for a total net credit. Ultimately, you're betting that the underlying stock or Index (or whatever you're trading) will not breach a certain level on the upside, and a certain level on the downside.
But what if it starts to move against you?
  • Do you just close and take a loss?
  • Do you adjust?
  • How do you adjust?
There is no one specific answer. That's what makes every trader unique. Every trader has their own trading style, risk profile, among other factors. One trader might prefer rolling out, while others might like to buy Out of The Money (OTM) options to relieve pressure. It all depends on individual view on the market structure.
I believe rolling out is best when markets are trending and buying (OTM) options when markets are chopping. You might disagree, and that's OK too. 
Let's take a look at a simple example: 
You sold a 10 delta spreads 40 days away. If the underlying is moving lower and your put spread goes from 10 delta to 25. What do you do? Look at your call side. Let's say you sold a call spread for .90¢, and it's now worth .14¢. That's not giving you much of a hedge against your put spread because it can only go down to 0. The best thing to do, if you don’t want to roll your put side, is to buy back your call spread for .14¢, taking in .76¢ profit on the call side and opening another spread for a higher credit. Worst case, if you're forced to roll your put side, you have some of the profit you took on your call side to work with.
The most important factor in this equation is the timing of these adjustments. The closer you are to expiration, the more it will cost. However, if you make the adjustment on time, you can turn a losing Iron Condor into a money maker.

SPX Dec'12 Iron Condor

Sell: Dec Monthly 1415 Put 
Buy: Dec Monthly 1410 Put
Sell: Dec Monthly 1470 Call
Buy: Dec Monthly 1475 Call
Credit: .45¢
Margin: $4.55
Return: 9.89%
  • 1420/1415 Put spread @.40¢

Risk Profile:


12/19/12 Update:
We're moving our short strike on the put side to 1420 and will look for a .40¢ credit.
12/21/12 Update:
This credit spread expired worthless, we kept full credit or 8.69% Return on margin.

December 18, 2012

Position Sizing

One of the key elements when it comes to investing is risk management. Investors that can successfully manage risk will make money in the long run. But many investors focus on how much money they want to make instead of properly managing their risk. I'd like to share one way to figure out how to manage risk and determine how much risk should an investor take.

Portfolio size: $50,000 
Risk per trade: 2% of overall portfolio: 50,000/.02 ($1,000)

That said, if your position is down $1000, you need to exit the trade and review your decision entering the trade, timing of entry, etc.

So, if you're putting on an Iron Condor trade, and if your stop out point is -$1000 and that's 20% of your risk, your risk total shouldn’t be more than $5,000

That means if the distance between your sold option and bought option is 10, ex: 450/460 calls or 320/310 puts you shouldn’t do more than 5 contracts. That's how you determine how many contract to trade.
The number of contacts will control your risk. Of course there are ways to manage losing positions to minimize loses but more importantly make adjustments on time. We provide live trade alerts and live adjustments to our premium Weeklys4Income members.

Iron Condors 101

There are a few things that anyone looking to trade Iron Condors need to know first:
  1. Iron Condor is a Volatility bearish trade
  2. Limited Risk/Limited Reward
  3. Low reward/high probability
  4. Goal is to let sold options expire worthless as you are selling time premium
What makes an Iron Condor is a combinations of a Bear Call Spread and a Bull Put Spread. Let's say XYZ is trading at 50 in May. To put on a Bear Call spread you would sell June 55 call and buy June 60 call. To put on a Bull Put spread you would sell a June 45 put and buy June 40 put. The reason for buying the wings (60 call and 40 put) is to limit downside. Speaking of downside, what is your total risk on this trade?
  • Max Loss = Strike Price of Long Option - Strike Price of Short Option - Net Premium Received
So, if you sold a Bear Call Spread for .40¢ your max loss is : 60-55-.40=4.60
Remember, each contract represents 100 shares of XYZ. Therefore your max loss on this trade would be $460. Same goes for the Bull Put Spread. 

Your breakeven points are:
  • Upside Breakeven Point = Strike Price of Short Call + Net Premium Received
  • Downside Breakeven Point = Strike Price of Short Put - Net Premium Received
One question people ask, why would anyone risk $460 to make $40?
And the answer is simple 40/460=8.69% return on risk. If you're collecting .40¢ for selling a Bear Call Spread and say you sell a Bull Put Spread for .60¢ (remember, Iron Condor is a cominations of bear calls and bull puts) now you have a total credit of $1. Now your looking to make $1 risking $4. That's 25% reward on risk. Since options expire every 3rd friday of each month, most would considered 25% return pretty good. 

AAPL Dec'12 Risk Reversal

Sell 510/505 Dec'12 Put Spread
Buy 535/540 Dec'12 Call Spread


Risk Profile:

Margin: 500 per contract
Max Gain: 500 per contract

12/18/12 Update:
Closing out this trade for +.70¢ per contract or 14% return on margin.

December 13, 2012

SPX Dec'12 Bull Put spread

Sell: Dec2 1400 Put 
Buy: Dec2 1395Put
Credit: .30¢
Margin: $4.70
Return: 6.38%
Fills: .30¢ credit.

Risk Profile:


12/14/12 Update:
This trade expired, we kept full credit.

December 12, 2012

SPX Dec'2 Iron Condor

Sell: Dec2 1410 Put 
Buy: Dec2 1405 Put
Sell: Dec2 1460 Call
Buy: Dec2 1465 Call
Credit: .50¢
Margin: $4.50
Return: 11.11%
Fills: Will be posted when/if order filled.

Risk Profile:


Update 12/13/12:
No fill for this trade, will look to enter new position.

December 6, 2012

SPX Dec'1 Iron Condor

Sell: Dec1 1390 Put 
Buy: Dec1 1385 Put
Sell: Dec1 1430 Call
Buy: Dec1 1435 Call
Credit: .45¢
Margin: $4.55
Return: 9.89%
  • 1430/1435 Bear Call spread sold for .20¢
  • 1390/1385 Bull Put spread sold for .25¢
Risk Profile:


Update 12/6/12:
I am also offering 1430/1435 Bear Call spread for current mid price of .20¢
Will post fills if/when orders go through.

Update 12/7/12:
This position is working well, we're going to leave it to expire between short strikes:

Update 12/9/12:
This position expired worthless for 9.89% Return.

December 3, 2012

Chart of two dying stars

Dell Inc was upgraded by Goldman Sachs and this stock is up almost 5% today. Let's see the daily chart on this puppy:

This stock has been in a solid downtrend since April of this year and there are a few clear levels that were support and now should act as resistance. Looking at this chart, it reminded me of a chart I saw earlier today. This chart happens to remind of a company that's in a similar position, except with smart phones and not PCs. And the winner is.... RIMM:

RIMM has been in a downtrend since early 2011 (actually since Apple released iPhone 1), and now it's at a critical level of resistance which was support before breaking underneath. It should be fun to see who wins, buyers or sellers and if we're going to see RIMM back in single digits again. Dell and RIMM charts are similar as they both have clear levels of support/resistance that these stocks can be traded against. Make sure you understand risks involved buying or selling any security and speak to a professional before taking this risk.