2:05 p.m. New York time

I’m passing on all four of the potential trades I analyzed:

• GDXJ continues to have a risk/reward ratio higher than I like, at 6.2:1.
• IYR also has a high risk/reward ratio, at 5.4:1
• XHB has a low implied volatility rank, at 11%. I prefer 25% or higher.
• XLRE has an options grid with odds that don’t quite work for me. Normally I’ll set the short call in an iron condor at delta 15, which will normally have somewhere around an 85% chance of expiring profitably, out of the money. XLRE’s delta 15 call strike has a 73% of expiring profitably. I’m unwilling to give up that security.

My present trading rules don’t set a firm cut-off for acceptable risk/reward ratio’s. So how high is too high? I’m playing it using the stomach-churn metric. Anything above 5:1 seems a bit scary to me — My $50 credit on a contract could produce a $250, and I get that strange uneasy feeling in my gut at the mere of thought of it. I feel more confident below 4.5:1, and turn cartwheels of happiness if anything gets below 3.5:1.

Scientific? No. Conducive to peace of mind? Absolutely. And even if that stomach churning feeling is produced by my subconscious, it’s a cri de cœur that I’m always inclined to heed.

12:45 p.m. New York time

I’ll be looking at these prospects today: XHB, GDXJ, XLRE and IYR.

By Tim Bovee, Portland, Oregon, April 30, 2019

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

Update 5/31/2019: I exited XOP when its price declined below the position’s profit zone, or the range between the two breakeven points of the short iron condor. My rules require a exit if the distance beyond the profit zone would require two days or more to return, using the 14-day average of the Rate of Change metric as an estimate of maximum speed. At exit XOP stood 2.2 days below the profit zone.

I exited for a $1.90 debit, $1.38 greater than the credit I received upon entering, with shares trading a $25.63, or $5.58 lower than when I entered the position.

XOP fell for three days while remaining within the profit zone, then traded sideways until a week before exit, when it gapped down below the zone’s lower boundary and continued to decline, gapping down yet again at the opening today, triggering the exit signal. The fossil fuel prices that underly the companies within the holdings of the exchange-traded fund fell for much of my holding period, and the final downward slide came in response to the Trump administration’s decision to place a 5% tariff on Mexico, which would add to the costs of U.S. refiners.

Shares declined by 17.9% over 32 days, or a -204% annual rate. The options position produced a -73% loss for a -828% annual rate. The implied volatility rate rose to 49% during my holding period.

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I have entered a short iron condor spread on XOP, using options that trade for the last time 53 days hence, on June 21. The premium is a $0.53 credit, and the stock at the time of entry was priced at $31.21.

The profit zone for this position is between $35.53 on the upside and $25.53 on the downside.

The implied volatility rank (IVR) stands at 25.

Premium:	$0.53	Expire OTM
XOP-iron condor	Strike	Odds	Delta
Long	38.00	96.0%	4
Break-even	35.53	90.0%	10.5
Short	35.00	84.0%	17
Puts
Short	28.00	81.0%	17
Break-even	25.53	87.5%	10.5
Long	25.00	94.0%	4

The premium is 17.7% of the width of the position’s wings.

The risk/reward ratio is 4.7:1.

By Tim Bovee, Portland, Oregon, April 29, 2019

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StoneCo Ltd. (STNE)

Update 4/29/2019: I exited STNE today for a loss, paying a debit of $3.75, nearly triple the entry credit. The fintech company was tick-tocking along within extraordinarily wide profit zone when a rival made an announcement that was seen as a threat to STNE corporate performance. Shares at the April 18 open gapped down by 14%, from $34.74 to $29.75. The stock price never recovered. See today’s post on DIS for a discussion of mitigation. Altogether, shares declined by $12.86 and the options position by $2.44.

Shares declined by 31.9% over 40 days, or a -291% annual rate. The options position produced a 65.1% loss for a -594% annual rate.

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STNE is another of the companies that I entered while working out my current strategy, so it wasn’t fully documented on March 20, when I entered a short iron condor spread on the company, using options that traded for the last time 58 days later, on May 17. The premium is a $1.31 credit and the stock at the time of entry was priced at $40.36.

The profit zone for this position is between $51.31 on the upside and $29.31 on the downside.

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SPDR S&P Biotech exchange traded fund (XBI)

Update 6/3/2019: My short iron condor on XBI became profitable 18 days before expiration, and I exited at 17% of maximum potential profit, paying a $0.68 debit with shares trading at $80.92. The implied volatility rate stood at 38.9%, which is 10.4 points above the entry level.

At the exit shares were $6.10 below the entry point, and the options position had gained a $0.14 profit.

Perhaps it is the lack of falling IVR that caused XBI to remain unprofitable on my preferred exit day, 21 days before exit. XBI fell for much of my holding period but remained comfortably in the profit zone, that is, between the two breakeven points. It provides a test case for my new exit rules. Previously, my rule was to get out 21 days before expiration. The new rules keep me in the position, but in a “sudden death” posture: When it becomes profitable, I exit, no matter how small the profit.

In the case of XBI, it was a tidy sum, and waiting over the weekend proved to be the right way. Other cases will help tell whether XBI was typical or an outlier in its behavior.

Shares fell by 7.0% over 35 days, or a $73% annual rate. The options position produced a 20.6% return for a +215% annual rate.

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I have entered a short iron condor spread on XBI, using options that trade for the last time 53 days hence, on June 21. The premium is an $0.82 credit and the stock at the time of entry was priced at $87.02.

The profit zone for this position is between $96.82 on the upside and $73.82 on the downside.

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8:35 p.m. New York time

XOP analysis upon entry posted.

3:40 p.m. New York time

OK. Busy day. I’ve newly posted the results for STNE and earlier, DIS. The latter has a discussion of how to mitigate the impact of headline surprises, which were responsible for the losses in both of these positions.

I’ve also posted my entry analysis for XBI. I’m afraid that XOP will have to wait until later today; the entry credit was $0.53.

3:05 p.m. New York time

My entry order for a short iron condor on XOP has been filled.

2 p.m. New York time

My order on XBI has been filled.

1:50 p.m. New York time

I’ve exited DIS and STNE, each for a loss.

1:35 p.m. New York time

I’ve placed short iron condor orders on XBI and XOP, rejecting the other prospects for having overly high risk/reward ratios. I.e. little bang, big bucks.

1:10 p.m. New York time

I’m also adding XBI, IYR and XOP to the prospects list, also all ETFs.

12:40 p.m. New York time

My plan today is to exit my remaining positions expiring March 17, and to begin reloading with positions expiring June 21, which is 53 days away. By my trading rules, I’d aim to exit the June 21 positions 21 days before expiration, on May 31.

The most likely prospects today, both exchange-traded funds, are GDXJ and INDA. I’ll be taking a look at them.

By Tim Bovee, Portland, Oregon, April 29, 2019

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3:45 p.m. New York time

I’ve finished catching up with my results calculations for the four positions I exited on Friday, April 26.

The analyses have been posted for EA, GDXJ, SPY and TWLO.

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

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SPDR S&P 500 ETF (SPY)

Update 4/26/2019: I exited SPY for an $0.83 loss on April 26, which is 21 days prior to expiration. Shares were trading at $291.53, or $9.17 above entry. Although the share price remained slightly below the break-even price, SPY had done nothing but rise since I had entered, and given the low implied volatility rank, I saw greater risk of greater loss rather than a profit.

I’ve seen Elliott wave analysis do this before — continue to trend upward even when the requirements for that uptrend are completed. The problem is with Elliott there are n boundaries in the direction of the trend except for the wave count, and waves can subdivide ad infinitum, allowing endless opportunities to say, in retrospect, “See, I was right.” 

Another problem with Elliott wave analysis, which is shares with every technical analysis device that I’ve seen, is that while it can say useful things about price, it is blind to time. As an options trader, time is of utmost importance for me. Time blindness, then, is a problem.

So going forward, I may consult Elliott wave analysis, but all trades, whether based on Elliott or not, will follow the same set of trading rules.

On this trade, shares rose by 3.3% over 37 days, or a +32% annual rate. The options position lost 53.6% for a -528% annual rate.

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On March 20 I entered a short call spread on SPY, using options that trade for the last time 58 days later, on May 17. The premium is a $0.72 credit and the stock at the time of entry was priced at $282.36.

The profit zone for this position is $292.28 and lower.

I entered the position based on bearish signals using Elliot wave analysis.

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VanEck Vectors Junior Gold Miners ETF (GDXJ)

Update 4/26/2019 : I exited GDXJ on April 26, which was 21 days prior to expiration, for an $0.89 debit, with shares at $29.92 per share. The loss on the position was $0.27 after a $2.38 decline in the shares price.

The price drop followed a decision by the Federal Open Market Committee, announced March 20, to stop raising interest rates. Basically, this is gold acting in its traditional role as a hedge against inflation.

Shares declined by 7.4% over 42 days, or a -64% annual rate. The optins position produced a loss of 30.3% for a -274% annual rate.

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On March 15 I entered a short iron condor spread on GDXJ, using options that trade for the last time 63 days later, on May 17. The premium is a $0.62 credit and the stock at the time of entry was priced at $32.30.

The profit zone for this position is between $36.62 on the upside and $27.62 on the downside.

I entered the position before formally restarting with my new trading rules.

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10:25 a.m. New York time

My two remaining positions that expire in 21 days are the bad boys: DIS and STNE, both of them iron condors that have moved beyond their profit zones, in defiance of high probabilities that they would remain within their zones. Driving home again the undeniable truth: Probabilities aren’t certainties. Q.E.D.

They are both in such awful shape that I may wait until Monday just to see what happens. DIS is dropping a bit back toward profitability, which might slightly mitigate the loss. STNE is zig-zagging sideways.

10:15 a.m. New York time

It’s 21 days until the May monthly options expire. Time to exit my positions built from those options.

Exited so far: EA and TWLO for a profit, GDX and SPY for a loss.

Results and details will be late today, due to a post-op medical appointment following yesterday’s lens replacement surgery.

By Tim Bovee, Portland, Oregon, April 26, 2019

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10 a.m. New York time

Friday according to my trading rules is when I shall exit the May monthly options, 21 days before expiration. That deadline involves five short iron condor positions: TWLO, DIS, EA, GDXJ and STNE. In addition, a short bear put vertical spread on SPY, using a different strategy, is in a losing position.

TWLO and EA are showing a profit if I were to exit today. The others are showing a loss at this point, and three of those — DIS, GDXJ and STNE — have moved beyond the profit zone, defined as the region between the short call strike price and the short put strike price. All in all, barring large price moves, it’s shaping up to be a dismal Friday.

The strategy I’m using relies on wide profit zones giving an 85% or so chance of expiring with a positive return. As always in that sort of statistical setup, it’s not a 100% guarantee, since there is a 15% chance that a position will incur a loss. April has turned out to be a 15% sort of month for these positions.

But, it’s not over yet, so we shall see what happens today into Friday.

By Tim Bovee, Portland, Oregon, April 24, 2019

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