3:20 p.m. New York time
I’ve exited my short iron condor position on KRE for a $0.19 debit, close to 50% of maximum potential profit. Results posed.
By Tim Bovee, Portland, Oregon, July 23, 2019
Author: Tim Bovee
Live: Monday, July 22, 2019
11:25 a.m. New York time
I’ve placed an exit order on my short iron condor position on KRE, bidding a debit of $0.18, a bit above 50% of maximum potential profit.
10:35 a.m. New York time
XBI results posted.
9:45 a.m. New York time
I have exited XBI for a $0.35 debit, close to 50% of maximum potential profit. Results to come.
By Tim Bovee, Portland, Oregon, July 19, 2019
Live: Friday, July 19, 2019
4:30 p.m. New York time
No fills.
9:40 a.m. New York time
I’ve placed exit orders on KRE and XBI at about 50% of maximum potential profit.
The next options expiry I’ll be trading are the September 20th monthlys. They are 63 days out from expiration, and my goal is to enter with 45 days remaining, on or near to August 6.
By Tim Bovee, Portland, Oregon, July 19, 2019
IBM Analysis
International Business Machines Corp. (IBM)
Note: This trade was based on a hypothetical study aimed at allowing hedged trading of earnings announcements. To ensure I had an accurate fill price, I converted the hypothetical high-risk portion of the hedge to an actual trade, which I placed on Wednesday.
Update 7/18/2019: As my experimental rules require, I have exited my short iron fly earnings play on IBM. As the closing bell approaches, it is trading beyond its zone of profitability. The implied volatility rank declined by 11 points to 42%.
IBM published earnings on July 17, swung wildly in the overnight trading, and then, after opening within the profit zone, swiftly rose to above the zone. The way I structured the trade, my maximum loss was $81 per contract. I got out for a $3.92 debit, producing a $79 loss per contract, $2 below the max. Shares at the exit were trading at $149.34, up $6.82 from their entry level.
Shares rose by 4.8% over one day, or a +1,747% annual rate. The options position produced a -20.2% loss for a -7,356% annual rate.
Update 7/18/2019: IBM published earnings after the closing bell on July 17, beating the street estimate by 9.2 cents for a quarterly result of $3.17 per share. The market had closed pre-earnings at $143, the short strike price of my iron fly. After the earnings announcement, the price almost instantly rose in after-hours trading to $149, quickly fell to $140.34, and then bounced, settling between $141 and $142. After the opening bell the price rose sharply again and as of 9:55 a.m. New York time was trading at $147.53, a dollar above the profit zone. The implied volatility rank stands more than three points of where it was before earnings.
As set out in the hypothetical study, the idea was for this high-risk trade to be paired with a low-risk trade expiring on August 16. The low-risk position, described in the hypothetical study, has a profit range running from $150.88 to $120.88 and had I made such a trade, would remain profitable with quite a large margin to spare.
On July 17 I entered a short iron fly spread on IBM, using options that trade for the last time two days hence, on July 19. The premium is a $3.13 credit and the stock at the time of entry was priced at $142.52.
The profit zone for this position is between $146.13 on the upside and $142.13 on the downside.
The implied volatility rank (IVR) stands at 53.
IBM publishes earnings after the closing bell the day of entry into the position.
| Premium: | $3.13 | Expire OTM | |
| IBM-iron fly | Strike | Odds | Delta |
| Long | 147.00 | 69.1% | 33 |
| Break-even | 146.13 | 59.6% | 42.8 |
| Short | 143.00 | 50.0% | 52.6 |
| Puts | |||
| Short | 143.00 | 50.0% | 47.4 |
| Break-even | 142.13 | 59.0% | 38.7 |
| Long | 139.00 | 67.9% | 30 |
The premium is 78.3% of the width of the position’s wings.
The risk/reward ratio is 0.3:1, with a maximum risk of $81 per contract and a maximum reward of $313 per contract.
By Tim Bovee, Portland, Oregon, July 17, 2019
Live: Thursday, July 18, 2019
3:35 p.m. New York time
GDXJ results posted.
3:20 p.m. New York time
GDXJ has moved above its profit zone, with the rate of change placing it more than a day beyond recovery. Following the dictates of my rules, I have exited for a $0.97 debit. Results upcoming.
1:40 p.m. New York time
I exited IBM for a loss and have updated the analysis with results.
10 a.m New York time
I’ve posted my analysis of the short iron fly position on IBM.
9:45 a.m. New York time
I have placed exit orders on KRE and XBI, as they continue to hover around 50% of maximum potential profit. This has been going on for several days, without fills at my bidding price.
IBM published earnings last night. I shall post an analysis shortly.
By Tim Bovee, Portland, Oregon, July 18, 2019
Thought Experiment: An IBM earnings play
Post-Final Update 8/2/2019: And the day after my paper exit, the market saw a significant decline, making the on-paper short iron condor on IBM profitable, at 14.8% of maximum potential profit. The on-paper price I’m using today is a 75 cent debit to exit, with shares trading for $146.62.
Interesting post-outcome. IBM proved to be an outlier on these trades, over and again. And the market itself, in the opening days of August, has proven to be stubborn mule with a mind not likely to listen to my expectations, or anyone else’s, for that matter.
Final Results 8/1/2019: My short iron condor paper trade on IBM, part of a thought experiment in hedging earnings plays, gave an exit signal today, ending the experiment.
It had two parts: One a short iron condor with a high probability of success, which I entered on paper on July 2, and a short iron fly with a lower probability of success, which I did as an actual trade on July 18. See IBM Analysis for details of the short-iron fly trade. The iron condor analysis is below.
The short iron condor position moved beyond the upper boundary of the profit zone, with a rate of change that meant it would take more than a day, at that rate, to return to the zone. Under my rules, with 15 days left until expiration, I was required to exit.
On paper, I exited IBM for $2.38, a $-150 loss per contract on the options, with shares trading for $151.88, or $11.66 above the entry price.
IBM rose sharply after earnings were announced, and rose sharply again today — two stormy punctuations amid a sideways flow.
Shares rose by 8.3% over 30 days, or a +101% annual rate. The options positions produced a 63.0% loss for a -767% annual rate.
Conclusion:
This was about as close to a disaster as this method could have produced.: a 63.0% loss on the iron condor and a 20.2% loss on the iron fly. Had I just done the earnings play alone, the percentage loss would have been a quarter of the combined total.
This is a sample size of one. Means nothing in itself. However, based on my experience with this trade, the results exceeded my worst nightmares. The risk estimates going into this experiment were based on the extremes: 100% losses and 100% wins. The interim results — read “actual results” — were more extreme.
I’ll continue to look at the question of how best to trade earnings announcements, but I’m not willing to jump in again without further study.
Last week I mused in an essay on how to expand the range of my high probability of success strategy by holding positions through an earnings announcement. The problem has always been that earnings announcements are by their very nature prone to surprises, and a surprise can take a wide iron condor, with 85% probabilities of success in either direction, and instantly turn it into a loser.
The strategy for trading earnings that I described is the polar opposite of my high probability strategy, which is longer-term, low report, low risk. In contrast, the earnings play strategy is short term, high reward, high risk.
The question is, can they work together, allowing me to hold iron condors on stocks through their earnings announcements.
IBM publishes earnings next Wednesday, July 17, after the closing bell. To get a better sense of how the two strategies interact, I’ve constructed two hypothetical trades. The first is a high probability trade, a paper trade using the August monthly options expiring Aug. 16 and entered 45 days before expiration. The second is a low probability earnings play using the July monthly options expiring July 19, two days after I enter the position.
Here’s what the analysis looks long for the longer-term trade with a higher probability of success:
International Business Machines Corp. (IBM)
I have, as a paper trade, on July 2 entered a short iron condor spread on IBM, using options that trade for the last time 45 days hence, on August 16. The premium is a $0.88 credit and the stock at the time of entry was priced at $140.22.
The profit zone for this position is between $150.88 on the upside and $120.88 on the downside.
The implied volatility rank (IVR) stands at (an estimated) 54%.
| Paper Premium: | $0.88 | Expire OTM | |
| IBM-iron condor | Strike | Odds | Delta |
| Long | 155.00 | 94.0% | 6 |
| Break-even | 150.88 | 90.0% | 11 |
| Short | 150.00 | 86.0% | 16 |
| Puts | |||
| Short | 125.00 | 86.0% | 12 |
| Break-even | 120.88 | 88.5% | 9.5 |
| Long | 120.00 | 91.0% | 7 |
The premium is 17.6% of the width of the position’s wings.
The risk/reward ratio is 4.7:1.
The hypothetical date of entry was July 2.
This is fairly typical of any of the high probability positions that I’ve been entering. A key metric to note is the risk/reward ratio. In this hypothetical trade, the most return I can gain is $88. The most I can lose is $412. That’s the price of setting the short-leg strike prices so far apart, and is why I’m reluctant to hold high probability low reward trades on stocks through an earnings announcement.
In this hypothetical exercise, on the trading day before the earnings announcement, I’m going to add in a second position, also an iron condor but sometimes called an “iron fly” to distinguish the two. While the short-leg strikes on most iron condors are different, they are in an iron fly the same.
For the iron fly, I’m entering the paper trade two days before expiration, on July 17, using the July monthlies expiring July 19. If the iron fly is profitable after the announcement, then I’ll let the position expire. If it is unprofitable, then I’ll attempt to exit on July 18 in order to reduce my loss.
The hypothetical iron fly analysis looks like this:
International Business Machines Corp. (IBM)
I have hypothetically entered a short iron fly spread on IBM, using options that trade for the last time two days hence, on July 19.
The premium is a $3.13 credit and the stock at the time of entry was priced at $142.52.
The profit zone for this position is between $146.13 on the upside and $142.19 on the downside.
The implied volatility rank (IVR) stands at 53.
| Premium: | $3.13 | Expire OTM | |
| IBM-iron fly | Strike | Odds | Delta |
| Long | 147.00 | 69.1% | 33 |
| Break-even | 146.13 | 59.6% | 42.8 |
| Short | 143.00 | 50.0% | 52.6 |
| Puts | |||
| Short | 143.00 | 50.0% | 47.4 |
| Break-even | 142.19 | 59.0% | 38.7 |
| Long | 139.00 | 67.9% | 30 |
The premium is 78.3% of the width of the position’s wings.
The risk/reward ratio is 0.3:1.
The hypothetical date of entry was July 17.
In setting up the iron fly trade, I aimed to set the long legs as close to a 30 delta as I could get. In this case that gave a reward that is nearly 10 times the risk. The return is capped at a comfortable $313 per contract, compared to a maximum loss of $87.
The result is a combined risk/reward ratio of 4.8, or a maximum loss of $499 per contract on the combined positions, and maximum win of $401 on the positions. A win/win on the two positions is more likely than a lose/lose outcome.
The lose/lose scenario adds $87 to my already considerable losses, so it’s not much in the way of additional pain.
A win on the high probability iron condor position combined with a loss on the low probability iron fly position would produce a $1 return per contract.
In the reverse, a win on the earnings play iron fly combined with a loss on the high probability iron condor produces an $99 loss, which produces a twinge of pain but falls short of a howl of agony. This is the least probable of the outcomes.
I find this to be an acceptable hedge. The most probable outcome saves me from a loss. The least probable saves me from catastrophe. And the best outcome gives a return nearly five times what I could expect from the high-probability iron condor alone. (The precise actual ratio is 3.6 times.)
It has the added advantage of giving me exposure to high volatility earnings plays while reducing the risk of such losses.
Next steps for this study:
On Thursday, July 18 (tomorrow), I’ll be looking at how the announcement impacted the price of the high-risk iron fly position. If it is in losing territory, I’ll try to exit. Otherwise, I’ll let the position expire.
On July 26 I’ll apply my normal non-earnings rules to the low-risk iron condor position and exit if there is any profit, no matter how low. If it’s not profitable, then I’ll continue to hold under the the sudden-death rules.
By Tim Bovee, Portland, Oregon, July 17, 2019
Live: Wednesday, July 17, 2019
4:30 p.m. New York time
No fill on KRE and XBI.
11:05 a.m. New York time
I’ve posted my study, “Thought Experiment: An IBM earnings play“.
10:05 a.m. New York time
I’ve posted results for IWM.
9:35 a.m. New York time
I’ve exited IWM for 50% of maximum potential profit, or a debit of $0.21. Full results to come.
I’ve also placed exit orders for 50% of max prof on KRE, for an $0.18 debit, and XBI, for a $0.33 debit.
By Tim Bovee, Portland, Oregon, July 17, 2019
Live: Tuesday, July 16, 2019
4:40 p.m. New York time
No fills on today’s orders.
12 a.m. New York time
As I mention often, my trading strategy for the most part derives from work done by the team at TastyTrade, a research and education organization founded by Tom Sosnoff, a former option floor trader in Chicago.
The biggest counter-intuitive element of the TastyTrade approach their handling of theta, the decline in options prices as expiration approach. They take an early management approach, exiting trades 21 days before expiration. The conventional wisdom, and all of my teachers when I was learning about trading, say that most of the profit comes at the very end, the week of expiration.
In this segment of their program “Market Measures” from Monday, Tom and former market maker Tony Battista discuss the two approaches and why they have concluded that early management is the best practice.
I highly recommend it.
10:45 a.m. New York time
XBI is again approaching 50% of maximum potential profit, and I have placed an exit order for a $0.33 debit.
9:35 a.m. New York time
As I did yesterday, I have today placed exit orders on IWM for a $0.21 debit and KRE for an $0.18 debit, each being 50% of maximum potential profit.
By Tim Bovee, Portland, Oregon, July 16, 2019
Live: Monday, July 15, 2019
Update 4:05 p.m.
None of today’s three exit orders was filled.
Update 2:45 p.m. New York time
XBI is trading within 6 cents of 50% of maximum potential profit, and I placed an exit order for a $0.33 debit.
Update 2:40 p.m. New York time
IWM is trading within 4 cents of 50% of maximum potential profit, and I placed an exit order for a $0.21 debit.
Update 10 a.m. New York time
KRE opened within 2 cents of attaining 50% of its maximum potential profit, and I placed an exit order for an $0.18 debit.
I’ve posted by post-mortem of my July 1 exit from NVDA and SMH. What if I had held these losing positions up to a week before expiration? “NVDA and SMH: What If?“.
By Tim Bovee, Portland, Oregon, July 15, 2019
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
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