NVDA and SMH: What If?

On July 1 my short iron condor positions NVDA and SMH — both in the semiconductor sector — became unprofitable as a result of news reports involving the U.S. trade disputes with China.

The options were the July monthlies, expiring July 19. Under my trading rules for high probability iron condors, I manage losing trades 21 days prior to expiration. After Day 21, my sudden death rule kicks in: “Exit if the price moves beyond the range of profitability by any amount.”

And that’s what I did with NVDA and SMH. But it’s always good to test rules, so I kept the positions alive as paper trades, to see what would happen if I held the position to the Monday prior to expiration.

The answer is, not much. NVDA was trading at a $4.89 debit when I exited 15 days before expiration. A week before expiration, the paper position was trading lower, for $4.04, but was still unprofitable. SMH rose from a $2.52 debit at exit to a $3.04 debit five days before expiration and also remained unprofitable.

In other words, I would have cut my loss by $85 per contract by continuing to hold NVDA, and increased my loss by $52 per contract by continuing to hold SMH. In return, I would have tied up the funds in those positions for an additional 15 days, missing the chance to re-invest that money in the August monthly options and perhaps having enough return to offset the loss.

In this case, I would say, my sudden death rule proved to be the better course.

By Tim Bovee, Portland, Oregon, July 15, 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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