1:40 p.m. New York time

My positions are ending the week profitable, except for EWZ, which is within its profit range but not yet profitable.

Next week I have two thought experiments that I’ll be posting. These are hypothetical trades testing alternative strategies by asking, “What if—-?”

The first will come on Monday, July 15, testing what would have happened had I held NVDA and SMH until the week of expiration, rather than exiting when they became unprofitable, as my rules require. In the intervening two weeks, did they become wildly profitable, branding my early exit as a costly mistake? Of did they continue to sink in the quicksand of loss, branding my early exit as a stroke of genius? Monday’s thought experiment will provide answers.

The second will come on Wednesday, July 17, testing the strategy I wrote about in an essay earlier this week, on July 10. The strategy would allow me to hold high-probability positions through earnings announcements by entering a very short term low probability position as a hedge. IBM’s earnings announcement after the closing bell gives me an opportunity to test the idea, on paper, no dollars at risk. I’ll post the analyses of the hypothetical trades on Wednesday and then follow through with results of the earnings play on Thursday and of the long-term position whenever I exit, most likely on July 26.

By Tim Bovee, Portland, Oregon, July 12, 2019

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My sole strategy the last few months has been

• wide iron condors (deltas of 20 or less for the two short legs)
• and high implied volatility ranks
• entered with about 45 days until expiration
• and managed at 21 days before expiration
• while avoiding earnings announcements.

Such a setup generally gives an 80%+ chance of earnings profit, always a good thing. But it limits the choice pretty much to exchange-traded funds. Because the dirty little of implied volatility is that it goes up as earning approach, and goes down quite suddenly once the earnings announcement has been made.

I think the term of art for such a situation is “stuck between a rock and hard place.” For the most part, I can’t find high implied volatility without earnings, and the surprises that come with earnings can destroy the advantage I get from trading wide and safe.

So what’s a trader to do? Here’s an approach I shall be trying.

The iron fly (a term coined by the team at the options education site TastyTrade, is the narrowest of iron condors, with the two short legs having the same strike price. Whereas the wide iron condors I trade generally will have a 4:1 risk/reward ratio, an iron fly can be set up so as to reverse that to a 1:4 risk/reward ratio.

An iron fly strategy for earnings would  to trade

• iron flys (deltas as close to 50 as possible on each of the two legs, consistent with their having identical strike prices)
• and high implied volatility ranks
• entered on the closest trading day to the earnings announcement
• with about two days before expiration
• and managed immediately after the earnings announcement or allowed to expire.

So for example, IBM publishes earnings on July 17 after the closing bell, meaning I would enter my trade on that day. The IV Rank (today) is 55.3%, which is quite high. The setup (if today were the day) is to trade options expiring July 19, short the $141 calls and puts, with the long wings $4 wide on each.

With that setup, the most I can lose per contract is $91 ($0.91 per contract/share), and I can potentially gain $324 per contract ($3.24 per contract/share). Thats a 1:3.6 risk/reward ratio.

Narrow the wings to $3 wide and the maximum is $259 per contract vs. a maximum loss of $41 (risk/reward = 1:6.3).

I’ll know before the next trading day what the outcome is, and I can decide whether to get out of a losing position a day before expiration, or let a winning position expire.

Earnings are devilishly difficult to predict. The iron fly strategy lessens the cost of being wrong to a trivial amount, and that’s what makes it attractive.

I’m still thinking about how the iron fly strategy might work with my wide iron condor strategy in order to allow me to hold wide iron condors through earnings announcements. Certainly a successful iron fly would enhance earnings from a wide iron condor. If the wide position has moved close to one of the wings, the iron fly could provide a hedge. Maybe. I still need to work that out, and I’ll post an update when I have.

By Tim Bovee, Portland, Oregon, July 10, 2019

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3:45 p.m. New York time

With 39 days remaining until expiration of the August options, I anticipate that there’s little chance that any of my positions will move beyond their profit zones.

sym	option debit	share price	curr % max profit
EWZ	0.61	45.59	(22.0)
GDXJ	0.32	34.65	11.1
IWM	0.39	155.25	7.1
IYR	0.41	90.24	4.7
KRE	0.36	53.33	2.7
XBI	0.61	85.59	7.6

At the end of the week, on Friday, I’ll revisit two losing trades with July options, NVDA and SMH, seeking to answer the question, What if I had held the positions rather complying with my trading rules and exiting?

By Tim Bovee, Portland, Oregon, July 8, 2019

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iShares Russell 2000 ETF (IWM)

Update July 17, 2019: I’ve exited IWM for 50% of maximum potential profit — a $0.21 debit, 21 cents less than the credit received at entry — as shares were trading for $155.28, which is 16 cents above the price at entry.

The price basically went nowhere during the position’s lifespan. The implied volatility rank fell from 13.9% at entry to 10.4% at exit, joining with the normal theta decay of options to produce the profit.

Shares rose by 0.1% over 12 days, or a +3% annual rate. The options positions produced a 100.0% return for a +3,042% annual rate.

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I have entered a short iron condor spread on IWM, using options that trade for the last time 42 days hence, on August 16. The premium is a $0.42 credit and the stock at the time of entry was priced at $155.12.

The profit zone for this position is between $163.42 on the upside and $143.42 on the downside.

The implied volatility rank (IVR) stands at 13.9%.

Premium:	$0.42	Expire OTM
IWM-iron condor	Strike	Odds	Delta
Long	165.00	91.0%	9
Break-even	163.42	88.0%	12
Short	163.00	85.0%	15
Puts
Short	145.00	85.0%	14
Break-even	143.42	87.0%	12.5
Long	143.00	89.0%	11

The premium is 21% of the width of the position’s wings.

The risk/reward ratio is 3.8:1.

By Tim Bovee, Portland, Oregon, July 5, 2019

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10:50 a.m. New York time

The IWM Analysis has been posted.

10:40 a.m. New York time

I generally like to carry half a dozen options positions at a time. I had five going into the 4th of July holiday, when U.S. markets were closed, and have now rounded out the set by entering a short iron condor position on IWM, which tracks the Russell 2000. I’ll post the analysis shortly.

By Tim Bovee, Portland, Oregon, July 5, 2019

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iShares U.S. Real Estate ETF (IYR)

Update 7/26/2019: I exited IYR 21 days before expiration, as required by my trading rules. The cost of existing was $0.36 debit, for a $0.07 yield, or 16.3% of maximum potential profit. Shares at exit were trading for $88.41, down $1.62 from the entry level.

The stock price peaked five trading days into my holding period, and then declined for eight trading days there after, ending with a sideways trend just below the $89 level. The implied volatility rank rose by three points to 31.4%.

Shares declined by 1.8% over 23 days, or a -29% annual rate. The options positions produced a +19.4% return for a 309% annual rate.

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I have entered a short iron condor spread on IYR, using options that trade for the last time 44 days hence, on August 16. The premium is a $0.43 credit and the stock at the time of entry was priced at $90.03.

The profit zone for this position is between $94.43 on the upside and $85.43 on the downside.

The implied volatility rank (IVR) stands at 28.4.

In constructing the position, I introduced a skew, increasing the profit zone on the upside and decreasing it on the downside.

Premium:	$0.43	Expire OTM
IYR-iron condor	Strike	Odds	Delta
Long	97.00	94.0%	5
Break-even	94.43	90.0%	9.5
Short	94.00	86.0%	14
Puts
Short	87.00	76.0%	24
Break-even	85.43	81.0%	19.5
Long	85.00	86.0%	15

The premium is 17.2% of the width of the position’s wings.

The risk/reward ratio is 4.8:1.

By Tim Bovee, Portland, Oregon, July 3, 2019

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SPDR S&P Regional Banking ETF (KRE)

Update 7/23/2019: I exited my short iron condor position on KRE at 48.6% of maximum potential profit. The debit was $0.19, leaving a net credit of $0.18, with shares trading for $53.46, up $0.27 from the entry price.

KRE traced a sideways path during my holding period, running in a $52 to $54 range. The implied volatility rank at the close was 25.6%, up 7.1 from its level at entry.

Shares rose 0.5% over 20 days, or a +9% annual rate. The options positions produced a +94.7% return for a +1,729% annual rate.

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I have entered a short iron condor spread on KRE, using options that trade for the last time 44 days hence, on August 16. The premium is a $0.37 credit and the stock at the time of entry was priced at $53.19.

The profit zone for this position is between $57.37 on the upside and $47.37 on the downside.

The implied volatility rank (IVR) stands at 20.1

Premium:	$0.37	Expire OTM
KRE-iron condor	Strike	Odds	Delta
Long	59.00	94.5%	6
Break-even	57.37	90.1%	11
Short	57.00	85.6%	16
Puts
Short	49.00	82.1%	16
Break-even	47.37	85.8%	12.5
Long	47.00	89.5%	9

The premium is 18.5% of the width of the position’s wings.

The risk/reward ratio is 4.4:1.

By Tim Bovee, Portland, Oregon, July 3, 2019

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11 a.m. New York time

Today’s entries along with yesterday’s gives me five positions for the August 16 expiration. My goal at this point is six positions. The markets close early today, at 1 p.m. New York time, in anticipation of the U.S. celebration on July 4. I’ll revisit after the holiday and see if I can find one more trade to round out the collection.

I was struck by how low implied volatility is, even lower today that the day before. SPY — the S&P 500 fund that many consider to be the blue-chip pulse of the stock market — has an implied volatility rank of only 9.9%, down from 14.1% yesterday.

10:55 a.m. New York time

I’ve entered a short iron condor position on IYR, introducing some skew in the structure.

10:20 a.m. New York time

I’ve entered a short iron condor position on KRE.

By Tim Bovee, Portland, Oregon, July 3, 2019

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iShares MSCI Brazil Capped ETF (EWZ)

Update 7/25/2019: I’ve exited my short iron condor position on EWZ for a $0.25 debit, which is 50% of maximum potential profit, with shares trading at $45.06, which is $1.40 above the entry price..

EWZ peaked nine days into the trade and then declined. The implied volatility rank at the exit was 7.9%, down 10.0 from the entry level.

Shares rose 3.2% over 23 days, or a +51% annual rate. The options position produced a 100.0% return for a +1,587% annual rate.

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I have entered a short iron condor spread on EWZ, using options that trade for the last time 45 days hence, on August 16. The premium is a $0.50 credit and the stock at the time of entry was priced at $43.66.

The profit zone for this position is between $48.50 on the upside and $37.50 on the downside.

The implied volatility rank (IVR) stands at 17.9%.

Premium:	$0.50	Expire OTM
EWZ-iron condor	Strike	Odds	Delta
Long	50.00	93.0%	8
Break-even	48.50	88.5%	12.5
Short	48.00	84.0%	17
Puts
Short	39.00	82.0%	16
Break-even	37.50	86.0%	12.5
Long	37.00	90.0%	9

The premium is 25% of the width of the position’s wings.

The risk/reward ratio is 3:1.

By Tim Bovee, Portland, Oregon, July 2, 2019

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SPDR S&P Biotech exchange traded fund (XBI)

Update 7/22/2019: My short iron condor position on XBI came close to half of its maximum potential profit and I exited for a profit. The cost of the exit was a $0.35 debit, producing a $0.31 profit, with shares trading at $85.51, down $1.82 from the entry price. The position earned 47.0% of maximum potential profit. The implied volatility rank was 17.2%, up 0.3 more than its entry level.

XBI traced a sideways movement throughout all but two sessions of its holding period, running in the $85 to $87 range. The first two sessions saw a rise to the $89 level and a decline thereafter.

Shares declined by 2.1% over 20 days, or a -38% annual rate. The options position produced an 88.6% return for a +1,616.43 annual rate.

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I have entered a short iron condor spread on XBI, using options that trade for the last time 45 days hence, on August 16. The premium is a $0.66 credit and the stock at the time of entry was priced at $87.33.

The profit zone for this position is between $95.66 on the upside and $76.66 on the downside.

The implied volatility rank (IVR) stands at 16.9.

Premium:	$0.66	Expire OTM
XBI-iron condor	Strike	Odds	Delta
Long	98.00	94.0%	7
Break-even	95.66	90.0%	11.5
Short	95.00	86.0%	16
Puts
Short	79.00	84.0%	15
Break-even	76.66	87.0%	12
Long	76.00	90.0%	9

The premium is 22% of the width of the position’s wings.

The risk/reward ratio is 3.5:1.

By Tim Bovee, Portland, Oregon, July 2, 2019

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