Live: Thursday, Oct. 9, 2019

6:25 p.m. New York time

My options positions remained in the sweet spot, on Thursday gradually accumulating profit as they march toward expiration.

A recent discussion on TastyTrade — my go-to spot for deep analysis of the art of constructing an options position — delved into the question of how to position the wings of a short iron condor, my preferred structure in trading.

My trading rules say:

Short leg entry goal: delta 16 to 24, adjusted for greater risk (the high deltas) balanced against greater reward (the lower deltas)

But they’re silent on where to place the long legs — the wings that every iron condor relies upon to limit potential loss.

And where to place the wings was the topic of the two-party discussion, “Iron Condor Wing Efficiency”. The videos can be found here: Part 1 and Part 2.

Those who follow my trades have perhaps noted that I tend to set the wings at as close to 6 delta as I can get. “Delta” measures the degree by which an option’s price changes relative to change in the price of the underlying shares. At a delta of 6% (0.06), a $1 change in the share price produces a 6 cent change in the options price.

The long wings of an iron condor have a different impact that do the short wings.

The short wings, which by my rules are generally around 20 delta, tell me by implication the probability of profit — how likely is this position to be a winner and how large the premium — the prize — will be. The higher the delta, the lower the probability of winning but the larger the prize will be. It’s a classic risk-reward relationship, where the higher the risk (lower delta), the greater the reward (premium).

The long wings limit our risk. Each is an insurance policy against loss. The lower the delta, the lower the cost of the insurance, but also the lower amount the “policy” will pay out in the event of a losing trade.

So when I choose the strike prices of the short and long wings, I’m choosing how large a prize I want to compete for, how much uncertainty I’m willing to tolerate, and how big a penalty I’m willing to may if I’m wrong.

Fundamentally, when I set the wings of a short iron condor, I’m referring a battle between greed and certainty.

A fascinating subject at the core of what we do as traders, and none dig into it — backed by research — than the TastyTrade crew. So I highly recommend these two episodes.

One specific point they mention is the goal of setting the wings so that the premium is a third of the wing width. In my six positions having November expirations, the premium coverage ranges from 15.4% to 20.8%, quite a distance from the one-third goal. This tells me that my setup is conservative, lowering the size of the prize for greater certainty of winning. In the battle between greed and certainty, certainty is coming out on top.

When the time comes, on Nov. 5, to enter the options positions expiring in December, I shall experiment with ways of increasing the premium coverage without giving away too much certainty.

By Tim Bovee, Fukuoka, Japan, October 9, 2019

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Live: Friday, Oct. 4, 2019

11 a.m. New York time

Commission-free trading

Yesterday, the brokerage TD Ameritrade went to commission-free trading of stocks and ETFs. On Monday, E*Trade is doing the same. No-commission trading was first launched by the crowd-funded start-up Robinhood in 2013. TD Ameritrade and E*Trade, finally catching up, are the big brokerages, with lots of amenities and customers.

What it means for my money management is that there is no longer a divide between current cash and investments. I can stay fully invested in shares or ETFs, earning money, and pulling it out for cash when needed, at no cost.

Moreover, it removes the last incentive for buy-and-hold trading. It costs nothing to enter a position, and nothing to get out. There’s no longer a cost to trading short-term trends. So, buy today to capture an expected rise, exit tomorrow with a small profit in hand, and move on to the next opportunity.

This creates a whole new world for managing our money. Way exciting.

Traveling abroad

I leave Monday for a trip to visit family in Japan. The U.S. markets open at 10:30 p.m. Japan Standard Time and close at 4 a.m. JST. Since I’m a morning person, this presents some difficulties in trading. For much of October my posts will be made at night U.S. time, after the markets close.

By Tim Bovee, Portland, Oregon, October 4, 2019

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XBI Analysis

SPDR S&P Biotech exchange traded fund (XBI)

I have entered a short iron condor spread on XBI, using options that trade for the last time 45 days hence, on November 15. The premium is a $1.01 credit and the stock at the time of entry was priced at $75.03

The profit zone for this position is between $83.01 on the upside and $62.01 on the downside.

The implied volatility rank (IVR) stands at 31.2.

Premium: $1.01 Expire OTM
XBI-iron condor Strike Odds Delta
Long 87.00 96.0% 5
Break-even 83.01 90.0% 11.5
Short 82.00 84.0% 18
Puts
Short 66.00 82.0% 15
Break-even 62.01 87.0% 10.5
Long 61.00 92.0% 6

The premium is 20.1% of the width of the position’s wings.

The profit zone covers a 10.6% move to the upside and a 21.0% move to the downside of the entry price, for total coverage of 31.6%

The risk/reward ratio is 4:1, with maximum risk of $399 and maximum reward of $101 per contract.

By Tim Bovee, Portland, Oregon, October 1, 2019

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XOP Analysis

SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

I have entered a short iron condor spread on XOP, using options that trade for the last time 45 days hence, on November 15. The premium is a $0.52 credit and the stock at the time of entry was priced at $21.56.

The profit zone for this position is between $24.52 on the upside and $17.52 on the downside.

The implied volatility rank (IVR) stands at 42.4%.

Premium: $0.52 Expire OTM
XOP-iron condor Strike Odds Delta
Long 27.00 94.0% 7
Break-even 24.52 89.0% 11
Short 24.00 84.0% 15
Puts
Short 19.00 84.0% 13
Break-even 17.52 88.0% 9.5
Long 17.00 92.0% 6

The premium is 20.8% of the width of the position’s wings.

The profit zone covers a 13.7% move to the upside and a 23.1% move to the downside of the entry price, for total coverage of 36.8%

The risk/reward ratio is 3.8:1, with maximum risk of $198 and maximum reward of $52 per contract.

By Tim Bovee, Portland, Oregon, October 1, 2019

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XLY Analysis

The Consumer Discretionary Select Sector SPDR Fund (XLY)

I have entered a short iron condor spread on XLY, using options that trade for the last time 45 days hence, on November 15. The premium is a $0.92 credit and the stock at the time of entry was priced at $119.72

The profit zone for this position is between $126.92 on the upside and $10392 on the downside.

The implied volatility rank (IVR) stands at 38.8%.

Premium: $0.92 Expire OTM
XLY-iron condor Strike Odds Delta
Long 129.00 95.0% 5
Break-even 126.92 90.0% 10.5
Short 126.00 85.0% 16
Puts
Short 111.00 82.0% 16
Break-even 103.92 88.0% 11
Long 103.00 94.0% 6

The premium is 16.7% of the width of the position’s wings.

The profit zone covers a 6.0% move to the upside and a 15.2% move to the downside of the entry price, for total coverage of 21.2%

The risk/reward ratio is 5:1, with maximum risk of $458 and maximum reward of $92 per contract.

By Tim Bovee, Portland, Oregon, October 1, 2019

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IWM Analysis

iShares Russell 2000 ETF (IWM)

I have entered a short iron condor spread on IWM, using options that trade for the last time 45 days hence, on November 15. The premium is a $1.20 credit and the stock at the time of entry was priced at $149.14.

The profit zone for this position is between $161.20 on the upside and $129.20 on the downside.

The implied volatility rank (IVR) stands at 26.9%.

Premium: $1.20 Expire OTM
IWM-iron condor Strike Odds Delta
Long 164.00 95.0% 6
Break-even 161.20 91.0% 10
Short 160.00 87.0% 14
Puts
Short 138.00 83.0% 16
Break-even 129.20 88.5% 11
Long 128.00 94.0% 6

The premium is 17.1% of the width of the position’s wings.

The profit zone covers an 8.1% move to the upside and a 15.4% move to the downside of the entry price, for total coverage of 23.5%

The risk/reward ratio is 4.8:1, with maximum risk of $580 and maximum reward of $121 per contract.

By Tim Bovee, Portland, Oregon, October 1, 2019

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TLT Analysis

iShares 20+ Year Treasury Bond ETF (TLT)

I have entered a short iron condor spread on TLT, using options that trade for the last time 45 days hence, on November 15. The premium is a $0.82 credit and the stock at the time of entry was priced at $143.52.

The profit zone for this position is between $151.82 on the upside and $132.82 on the downside.

The implied volatility rank (IVR) stands at 66.4%.

Premium: $0.82 Expire OTM
TLT-iron condor Strike Odds Delta
Long 157.00 94.0% 6
Break-even 151.82 89.0% 11.5
Short 151.00 84.0% 17
Puts
Short 136.00 85.0% 15
Break-even 132.82 89.5% 10.5
Long 132.00 94.0% 6

The premium is 16.4% of the width of the position’s wings.

The profit zone covers a 5.8% move to the upside and an 8.1% move to the downside of the entry price, for total coverage of 13.8%

The risk/reward ratio is 5.1:1, with maximum risk of $418 and maximum reward of $82 per contract.

By Tim Bovee, Portland, Oregon, October 1, 2019

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GDX Analysis

VanEck Vectors Gold Miners ETF  (GDX)

I have entered a short iron condor spread on GDX, using options that trade for the last time 45 days hence, on November 15. The premium is a $0.45 credit and the stock at the time of entry was priced at $27.17.

The profit zone for this position is between $30.45 on the upside and $22.45 on the downside.

The implied volatility rank (IVR) stands at 72.9%.

Premium: $0.45 Expire OTM
GDX-iron condor Strike Odds Delta
Long 33.00 95.0% 6
Break-even 30.45 90.0% 12
Short 30.00 85.0% 18
Puts
Short 24.00 82.0% 16
Break-even 22.45 88.0% 10.5
Long 22.00 94.0% 5

The premium is 18.0% of the width of the position’s wings.

The profit zone covers a 12.1% move to the upside and a 21.0% move to the downside of the entry price, for total coverage of 33.1%

The risk/reward ratio is 4.6:1, with maximum risk of $205 and maximum reward of $45 per contract.

By Tim Bovee, Portland, Oregon, October 1, 2019

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Live: Tuesday, Oct. 1, 2019

2:50 p.m. New York time

XBI Analysis posted.

And that’s a wrap for the November setup, with six short iron condor positions, on GDX, IWM, TLT, XBI, XLY and XOP. Management day will be October 25, which is 21 days prior to expiration, the day on which I sell all remaining profitable positions. Expiration is November 15.

2:20 p.m. New York time

XOP Analysis posted.

2 p.m. New York time

I’ve posted XLY Analysis after the adjusting the order in order to get a fill. Note that the short put strike was moved a dollar lower to accomodate a price change after I entered the order.

1:30 p.m. New York time

I’ve posted IWM Analysis after my short iron condor entry order was filled.

12:30 p.m. New York time

And as the final entry order of the day, a short iron condor on XBI, structured +p62 -p67 -c83 +c88, with an ask of a $1.08 credit.

12:15 p.m. New York time

I’ve placed an entry order for a short iron condor on IWM, structured as +128p -138p -160c +164c, asking for a $1.20 credit.

11:10 a.m. New York time

TLT Analysis posted after my short iron condor order was filled at the asking price.

10:55 a.m. New York time

Entry order for a short iron condor on TLT placed. The structured is +p17 -p19 -c25 +c27, with a credit ask of $0.39.

10:40 a.m. New York time

I’ve placed an entry order for a short iron condor on TLT, structured as +p32 -p36 -c51 +c57. The credit ask is $0.82.

10:20 a.m. New York time

GDX Analysis posted after my short iron condor order was filled.

10:10 a.m. New York time

I’ve placed an entry order for a short iron condor on XLY, structured as +p105 -p112 -c126 +c129, asking for a credit of $0.94.

10 a.m. New York time

Today is entry day for my options trading, 45 days prior to expiration of the November 15, 2019 monthlies. In describing the structure of each short iron condor order, I’ll prefix long options with a + and short with a -, each followed “p” for put or “c” for call, and the strike price.

I’ve placed my first entry order, for GDX, structured as +p22 -p24 -c30 +c33. My asking price is $0.45. No fill as of yet.

By Tim Bovee, Portland, Oregon, October 1, 2019

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Live: Friday, Sept. 27, 2019

1:50 p.m. New York time

I’ve updated XOP Analysis with results.

1:30 p.m. New York time

I’ve updated GLD Analysis with results.

12:50 p.m. New York time

I’ve exited GLD for a $1.54 debit, or 3.1% of maximum potential profit. An update with results is on its way.

This was the last of my OCT options holdings. Next step is set up for the NOV options positions, all of them short iron condors expiring November 15. I’ll be entering those positions on Tuesday, October 1, which is 45 days prior to expiration.

9:45 a.m. New York time

This is management day for my OCT options, 21 days before expiration, the day when I exit all profitable positions, however small that profit might be.

I’ve exited XOP for a $0.35 debit, or 20.5% of maximum potential profit. I shall update the analysis with results later this morning.

My other holding GLD, dropped slightly below the short put strike price, moving the position into loss territory. I’ll keep a close watch on it today and exit if it moves back to profit.

By Tim Bovee, Portland, Oregon, September 27, 2019

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