Live: Wednesday, March 29, 2019

10:35 a.m. New York time

Under my trading rules, Friday is get-outta-town day on my positions that expire on June 21. The rule says, “Exit timing: No later than 21 days prior to expiration”, which is May 31 for the June monthlys. The rule is based on research conducted by TastyTrade, which in my opinion is conducting valuable research aiming at testing the lore of the options markets.

The way the TastyTrade team presented it, the best results come from exiting at the 21 day mark. It’s not a rule guaranteed to give the best results for every trade, but across a large enough sample of trades, it will give the best results compared to holding until expiration.

But I limit myself to half a dozen positions or so, not a big sample. And since to get a full sample I must amalgamate trades over time, I run into the problem that the markets broadly go through good periods and bad (however you want to define those two loaded words). In a bad period, all of your positions might be within the profit zone at expiration, but for a variety of factors, including the movement of implied volatility, all might well not be profitable 21 days out.

That’s the problem some of my June positions are facing now. All of my positions discussed here are short iron condors, with the short positions set as close to delta 20 as I could manage and with the wings set at around $2 wide.

One position, XOP, is below the profit zone. Given its rate of change, it would take 1.4 days to return to the zone. It comes under the 21-day rule, but I’ll exit earlier if the distance below profit increases to two days.

Two positions — UNH and XBI — are within the profit zone and are now showing a profit. UNH shows 30.3% of maximum potential profit, and XBI, 13.4%. They’re functioning as expected according to the assumptions of the 21-day rule, and if they remain profitable, I would anticipate exiting them on Friday.

But two positions, arguably, don’t really meet those assumptions. AAPL and XLB are showing losses, although each remains between the two breakeven points (the midpoints of the wings).

The way I measure a position’s prospects is to compare the profit zone to the current one standard deviation range. When position isn’t profitable this late in its lifespan, then that usually means that the price is near one of the boundaries.

And such is the case. AAPL, trading at $176.50 shortly after the open, is 0.9% above the lower breakeven price of $171.18, and XLB, at $52.82, is 1.1% above the lower breakeven of $49.48. AAPL has a rate of change of -12.27, and XLB, a ROC of -3.45. At those rates either could break below the breakeven in a fraction of a day.

At this point, I’m abandoning the statistical approach and doing some old fashioned chart and financial news work.

AAPL has been on a downward slope since May 1 and is well above its most recent major support level, a reversal at $142 on Jan. 3. XLB has been trending downward since May 29 and in fact this morning at the opening gapped down by $1.01. Its major support was set Dec. 26 of last year at $47.05.

Very grim on the chart, both of them.

On the news side, Citi on Tuesday lowers its target for AAPL from $220 to $205, while maintaining a bullish stance. Knowing the optimism built into brokerage analysis, I take that as a signal to be cautious with AAPL. Notably, 20% of the company’s revenue is from China, and trade relations with China are filled with uncertainty during that nation’s tariff dispute with the U.S.

XLB is an ETF invested in materials companies, such as DWDP. That sector trades with China and so is also affected by the tariff dispute. However, analysts are less cautionary with XLB than they are with AAPL.

I’ve heard it said, often, that “rules are rules”, implication being that they are to be followed under all circumstances. I’ve never really believed that. In trading, I think rules are important. They help me avoid trading by hunch or following my feelings. Yet, rules are useful tools, not unquestioned truths. Their other useful function is that when it makes sense, as a hunch, that they should be followed, then I’m forced to rationally analyze why breaking the rules makes sense.

So, I’ll follow the 21-day rule for the profitable positions expiring in June: UNH and XBI.

At this point, my inclination is to hold AAPL and XLB past the 21-day mark, subject to the tentative exit rules I added a few days back to the Management section. If a symbol moves below the profit range, then I’ll exit, immediately.

That’s a modification of the current exit rule. When I revise, I’ll add in a sudden death clause for positions expiring in fewer than 21 days. Also, if the current one standard deviation boundary moves more than 50% beyond the lower breakeven point, that will also be a signal for immediate exit.

I won’t revise the rules yet. I want to see how this plays out.

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


Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

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