5:55 p.m. New York time
I’ve exited my position on XOP for half of maximum potential profit and have updated the analysis with results.
By Tim Bovee, Fukuoka, Japan, October 17, 2019
Live: Wednesday, Oct. 16, 2019
10:55 p.m. New York time
An exit order on my GDX short iron condor, placed at about half of maximum potential profit, was filled during today’s session. The results can be seen here.
By Tim Bovee, Fukuoka, Japan, October 16, 2019
Live: Tuesday, Oct. 15, 2019
5:55 p.m. New York time
I’ve posted the XLY results.
5:45 p.m. New York time
I’ve posted the IWM results.
5:25 p.m. New York time
I exited two short iron condor options positions today, IWM and XLY, each at 50% of maximum potential profit. I shall post results shortly.
By Tim Bovee, Fukuoka, Japan, October 15, 2019 (October 16 JST)
Live: Thursday, Oct. 9, 2019
6:25 p.m. New York time
My options positions remained in the sweet spot, on Thursday gradually accumulating profit as they march toward expiration.
A recent discussion on TastyTrade — my go-to spot for deep analysis of the art of constructing an options position — delved into the question of how to position the wings of a short iron condor, my preferred structure in trading.
My trading rules say:
Short leg entry goal: delta 16 to 24, adjusted for greater risk (the high deltas) balanced against greater reward (the lower deltas)
But they’re silent on where to place the long legs — the wings that every iron condor relies upon to limit potential loss.
And where to place the wings was the topic of the two-party discussion, “Iron Condor Wing Efficiency”. The videos can be found here: Part 1 and Part 2.
Those who follow my trades have perhaps noted that I tend to set the wings at as close to 6 delta as I can get. “Delta” measures the degree by which an option’s price changes relative to change in the price of the underlying shares. At a delta of 6% (0.06), a $1 change in the share price produces a 6 cent change in the options price.
The long wings of an iron condor have a different impact that do the short wings.
The short wings, which by my rules are generally around 20 delta, tell me by implication the probability of profit — how likely is this position to be a winner and how large the premium — the prize — will be. The higher the delta, the lower the probability of winning but the larger the prize will be. It’s a classic risk-reward relationship, where the higher the risk (lower delta), the greater the reward (premium).
The long wings limit our risk. Each is an insurance policy against loss. The lower the delta, the lower the cost of the insurance, but also the lower amount the “policy” will pay out in the event of a losing trade.
So when I choose the strike prices of the short and long wings, I’m choosing how large a prize I want to compete for, how much uncertainty I’m willing to tolerate, and how big a penalty I’m willing to may if I’m wrong.
Fundamentally, when I set the wings of a short iron condor, I’m referring a battle between greed and certainty.
A fascinating subject at the core of what we do as traders, and none dig into it — backed by research — than the TastyTrade crew. So I highly recommend these two episodes.
One specific point they mention is the goal of setting the wings so that the premium is a third of the wing width. In my six positions having November expirations, the premium coverage ranges from 15.4% to 20.8%, quite a distance from the one-third goal. This tells me that my setup is conservative, lowering the size of the prize for greater certainty of winning. In the battle between greed and certainty, certainty is coming out on top.
When the time comes, on Nov. 5, to enter the options positions expiring in December, I shall experiment with ways of increasing the premium coverage without giving away too much certainty.
By Tim Bovee, Fukuoka, Japan, October 9, 2019
Live: Friday, Oct. 4, 2019
11 a.m. New York time
Commission-free trading
Yesterday, the brokerage TD Ameritrade went to commission-free trading of stocks and ETFs. On Monday, E*Trade is doing the same. No-commission trading was first launched by the crowd-funded start-up Robinhood in 2013. TD Ameritrade and E*Trade, finally catching up, are the big brokerages, with lots of amenities and customers.
What it means for my money management is that there is no longer a divide between current cash and investments. I can stay fully invested in shares or ETFs, earning money, and pulling it out for cash when needed, at no cost.
Moreover, it removes the last incentive for buy-and-hold trading. It costs nothing to enter a position, and nothing to get out. There’s no longer a cost to trading short-term trends. So, buy today to capture an expected rise, exit tomorrow with a small profit in hand, and move on to the next opportunity.
This creates a whole new world for managing our money. Way exciting.
Traveling abroad
I leave Monday for a trip to visit family in Japan. The U.S. markets open at 10:30 p.m. Japan Standard Time and close at 4 a.m. JST. Since I’m a morning person, this presents some difficulties in trading. For much of October my posts will be made at night U.S. time, after the markets close.
By Tim Bovee, Portland, Oregon, October 4, 2019
XBI Analysis
SPDR S&P Biotech exchange traded fund (XBI)
Update 10/25/2019: My short iron condor position on XBI was profitable on the day I exited, 21 days prior to expiration, the time in the options lifecycle that I exit all remaining profitable plays, leaving only the losses to deal with.
As with so much in my rulebook, the practice follows the old Wall Street argument in favor of prudence, “Bulls make money. Bears make money. Pigs get slaughtered.” I paid a $0.87 debit to exit, $0.14 below the $1.01 entry credit I received and amounting to 13.9% of maximum potential profit, with shares trading at $79.83 at exit, $4.80 above their entry level.
XBI broke from its sideways pattern 15 days after entry, rising steadily for seven days before stabilizing at a higher level. The implied volatility rank at exit was 5.2%, down 26.0 points from the entry level.
Shares saw a net rise of 6.4% over 24 days, or a 97% annual rate. The options position produced a 16.1% return for a 245% annual rate.
I have entered a short iron condor spread on XBI, using options that trade for the last time 45 days hence, on November 15. The premium is a $1.01 credit and the stock at the time of entry was priced at $75.03
The profit zone for this position is between $83.01 on the upside and $62.01 on the downside.
The implied volatility rank (IVR) stands at 31.2.
| Premium: | $1.01 | Expire OTM | |
| XBI-iron condor | Strike | Odds | Delta |
| Long | 87.00 | 96.0% | 5 |
| Break-even | 83.01 | 90.0% | 11.5 |
| Short | 82.00 | 84.0% | 18 |
| Puts | |||
| Short | 66.00 | 82.0% | 15 |
| Break-even | 62.01 | 87.0% | 10.5 |
| Long | 61.00 | 92.0% | 6 |
The premium is 20.1% of the width of the position’s wings.
The profit zone covers a 10.6% move to the upside and a 21.0% move to the downside of the entry price, for total coverage of 31.6%
The risk/reward ratio is 4:1, with maximum risk of $399 and maximum reward of $101 per contract.
By Tim Bovee, Portland, Oregon, October 1, 2019
XOP Analysis
SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
Update 10/17/2019: My short iron condor on XOP hit 50% of maximum potential profit, and I exited for a debit of $0.26 with shares trading for $20.96, down $0.60 from my entry point.
XOP fell for three trading days after entry and then moved sideways for the remainder of the positions lifespan, staying within the narrow range of $20.37 to $20.48. The implied volatility range was 25.5% at exit, down 16.9 points from its entry level.
Shares declined by 2.8% over 16 days, or an annual rate of -63%. The options position produced a 100.0% return for a +2,281% annual rate.
I have entered a short iron condor spread on XOP, using options that trade for the last time 45 days hence, on November 15. The premium is a $0.52 credit and the stock at the time of entry was priced at $21.56.
The profit zone for this position is between $24.52 on the upside and $17.52 on the downside.
The implied volatility rank (IVR) stands at 42.4%.
| Premium: | $0.52 | Expire OTM | |
| XOP-iron condor | Strike | Odds | Delta |
| Long | 27.00 | 94.0% | 7 |
| Break-even | 24.52 | 89.0% | 11 |
| Short | 24.00 | 84.0% | 15 |
| Puts | |||
| Short | 19.00 | 84.0% | 13 |
| Break-even | 17.52 | 88.0% | 9.5 |
| Long | 17.00 | 92.0% | 6 |
The premium is 20.8% of the width of the position’s wings.
The profit zone covers a 13.7% move to the upside and a 23.1% move to the downside of the entry price, for total coverage of 36.8%
The risk/reward ratio is 3.8:1, with maximum risk of $198 and maximum reward of $52 per contract.
By Tim Bovee, Portland, Oregon, October 1, 2019
XLY Analysis
The Consumer Discretionary Select Sector SPDR Fund (XLY)
Update 10/15/2019: My short iron condor position on XLY reached 50% of its maximum potential profit, and I exited for a $0.46 debit, with shares trading at $121.00, up $1.28 from their price when I opened the position.
XLY fell on the day I opened the position, traded sideways for seven days, and then rose to above the entry level. The implied volatility rank fell by 5.5 points, from 38.8% to 33.3%.
Shares rose by 1.1% over 14 days, or a +28% annual rate. The options position produced a 100.0% return for a +2,607% annual rate.
I have entered a short iron condor spread on XLY, using options that trade for the last time 45 days hence, on November 15. The premium is a $0.92 credit and the stock at the time of entry was priced at $119.72
The profit zone for this position is between $126.92 on the upside and $10392 on the downside.
The implied volatility rank (IVR) stands at 38.8%.
| Premium: | $0.92 | Expire OTM | |
| XLY-iron condor | Strike | Odds | Delta |
| Long | 129.00 | 95.0% | 5 |
| Break-even | 126.92 | 90.0% | 10.5 |
| Short | 126.00 | 85.0% | 16 |
| Puts | |||
| Short | 111.00 | 82.0% | 16 |
| Break-even | 103.92 | 88.0% | 11 |
| Long | 103.00 | 94.0% | 6 |
The premium is 16.7% of the width of the position’s wings.
The profit zone covers a 6.0% move to the upside and a 15.2% move to the downside of the entry price, for total coverage of 21.2%
The risk/reward ratio is 5:1, with maximum risk of $458 and maximum reward of $92 per contract.
By Tim Bovee, Portland, Oregon, October 1, 2019
IWM Analysis
iShares Russell 2000 ETF (IWM)
Update 10/15/2019: My short iron condor position on IWM reached 50% of its maximum potential profit, and I exited for a $0.60 debit with shares trading at $150.08, up $0.94 from its price when the position was opened.
IWM fell on the day I entered the position, traded sideways for seven days and then rose again, to a level slightly below its entry-day peak. The implied volatility rank fell 15.4 points, from 26.9% to 11.5%.
Shares showed a net rise of 0.6% over 14 days, or a +16% annual rate. The options position produced a 100.0% return for a +2,607% annual rate.
I have entered a short iron condor spread on IWM, using options that trade for the last time 45 days hence, on November 15. The premium is a $1.20 credit and the stock at the time of entry was priced at $149.14.
The profit zone for this position is between $161.20 on the upside and $129.20 on the downside.
The implied volatility rank (IVR) stands at 26.9%.
| Premium: | $1.20 | Expire OTM | |
| IWM-iron condor | Strike | Odds | Delta |
| Long | 164.00 | 95.0% | 6 |
| Break-even | 161.20 | 91.0% | 10 |
| Short | 160.00 | 87.0% | 14 |
| Puts | |||
| Short | 138.00 | 83.0% | 16 |
| Break-even | 129.20 | 88.5% | 11 |
| Long | 128.00 | 94.0% | 6 |
The premium is 17.1% of the width of the position’s wings.
The profit zone covers an 8.1% move to the upside and a 15.4% move to the downside of the entry price, for total coverage of 23.5%
The risk/reward ratio is 4.8:1, with maximum risk of $580 and maximum reward of $121 per contract.
By Tim Bovee, Portland, Oregon, October 1, 2019
TLT Analysis
iShares 20+ Year Treasury Bond ETF (TLT)
Update 10/23/2019: I’ve exited my short iron condor position on TLT as it attained 50% of maximum potential profit. I closed the position for a $0.41 debit, half of the $0.82 credit I received upon entry. Shares at exit were trading at $140.16, down $2.95 from their entry level.
TLT rode a roller coaster during the lifespan of my position. It rose sharply for four days and then declined for 11 days to below its price when I entered the position, thereafter recovering for two days and triggering my exit. The implied volatility rank at exit was 40.8%, down 25.6 points from the entry level.
Shares had a net decline of 2.1% over 22 days, or a -34% annual rate. The options position produced a 100.0% return for a +1,659% annual rate.
I have entered a short iron condor spread on TLT, using options that trade for the last time 45 days hence, on November 15. The premium is a $0.82 credit and the stock at the time of entry was priced at $143.52.
The profit zone for this position is between $151.82 on the upside and $132.82 on the downside.
The implied volatility rank (IVR) stands at 66.4%.
| Premium: | $0.82 | Expire OTM | |
| TLT-iron condor | Strike | Odds | Delta |
| Long | 157.00 | 94.0% | 6 |
| Break-even | 151.82 | 89.0% | 11.5 |
| Short | 151.00 | 84.0% | 17 |
| Puts | |||
| Short | 136.00 | 85.0% | 15 |
| Break-even | 132.82 | 89.5% | 10.5 |
| Long | 132.00 | 94.0% | 6 |
The premium is 16.4% of the width of the position’s wings.
The profit zone covers a 5.8% move to the upside and an 8.1% move to the downside of the entry price, for total coverage of 13.8%
The risk/reward ratio is 5.1:1, with maximum risk of $418 and maximum reward of $82 per contract.
By Tim Bovee, Portland, Oregon, October 1, 2019
You must be logged in to post a comment.