10:25 a.m. New York time
All six of my positions remain within their profit zones this morning, as they have since entry. They all expire in 44 days, on June 21, with exits expected by May 31.
The positions are short iron condors on CGC, IYR, UNH, XBI, XLB and XOP.
By Tim Bovee, Portland, Oregon, May 8, 2019
Trading Rules are well and good, but sometimes it makes more sense to run for the exits, in as orderly a fashion as possible — without screaming; only whimpering allowed — but very, very quickly.
Such was the case with my DIS position, short iron condors expiring May 17. All went well, with the price within the profit zone, until April 12. In response to a news report, the price gapped up by nearly 10%, putting it almost $2 above the upper boundary of the profit range.
On that day, in words that now make me blush, I wrote, “the higher open was only $1.91 above the upside breakeven point, suggesting a good chance of recovery back to profitability in the 35 days left before expiration.”
The price kept slowly rising, and I took a heavy loss when I exited 17 days later. So sad. But I’m a self-correcting trader. Lessons must be learned. And that’s what I’ve been engaged in for the past few days.
On April 12 I was attempting to answer the question a trader must consider every day: “How high is high?” I got the answer wrong.
When in doubt, go to the math.
I define high by a metric derived from the options pricing: One standard deviation (1SD) of implied volatility, converted to a range of the share price adjusted for the number of days until the options expire. Nearly seven times out of 10 (68.2%), the price will close within the 1SD range at the target date. Most applications use the options expiration date as the target. I use 21 days before expiration, since that’s when I exit under my trading rules.
So it’s easy subtraction to determine how far from the profit zone the current 1SD boundaries are. I convert it into a percentage of 1SD that lies beyond the profit zone.
But 1SD distance alone is not the answer. There’s the matter of time — how many days would it take to get back to profitability.
The answer to that lies in a metric called the Rate of Change, which is the percentage change in the share price, generally over 14 days although that period is adjustable.
To calculate how many days it would take to return to profitability, calculate the distance between the current price and the boundary of the profit zone, and divide it by the daily rate of change (distance divided by the 14-day rate of change divided by the number days until exit day, that is, 21 days before expiration).
That gives me two metrics to consider in making my exit decision. For DIS, on April 12, 70% of the 1SD range was above the profit zone. I.e., the odds were definitely not in my favor. Moreover, it would have taken five days plus change to cover the distance back to profitability, at the pre-gap rate of change. Since share prices rarely move more than a few days with a retracement, that’s quite a considerable distance.
So, with those metrics at hand, I would have headed for the exit without hesitation, thereby limiting the damage.
I’m not putting this into my rules yet, but here’s my initial plan:
If more than half of the 1SD range is beyond the profit zone in the tested direction, then exit. If the number of days required for the price to return to the profit zone is greater than two, then exit.
All of my current holdings are within the profit zone, so neither of these metrics is in play at present. But I have the tools in hand in case of need, and we’ll see how well they match the real world.
By Tim Bovee, Portland, Oregon, May 4, 2019
Materials Select Sector SPDR Fund (XLB)
Update 6/4/2019: XLB turned profitable 17 days before expiration, and I exited my short iron condor position for 22.9% of maximum potential profit. It cost me a $0.37 debit to close the position, leaving an $0.11 profit from the entry credit of $0.48.
XLB languidly fell for most of the period I held the position, and then rose sharply for two last two days. I exited with share prices trading at $54.97, down $1.50 from the entry price. The implied volatility ratio at the close was 32.5%, up 4 points from when I entered the position.
Shares declined by 2.7% over 32 days, or a -30% annual rate. The options position produced a 29.7% return for a +339% annual rate.
I have entered a short iron condor spread on XLB, using options that trade for the last time 49 days hence, on June 21. The premium is a $0.48 credit and the stock at the time of entry was priced at $56.47.
The profit zone for this position is between $59.48 on the upside and $49.48 on the downside.
The implied volatility rank (IVR) stands at 28.5.
| Premium: | $0.48 | Expire OTM | |
| XLB-iron condor | Strike | Odds | Delta |
| Long | 61.00 | 96.0% | 5 |
| Break-even | 59.48 | 89.0% | 12.5 |
| Short | 59.00 | 82.0% | 20 |
| Puts | |||
| Short | 53.00 | 80.0% | 18 |
| Break-even | 49.48 | 86.0% | 12.5 |
| Long | 49.00 | 92.0% | 7 |
The premium is 16% of the width of the position’s wings.
The risk/reward ratio is 5.3:1.
By Tim Bovee, Portland, Oregon, May 3, 2019
12:42 p.m. New York time
XLB order filled for a $0.48 credit with shares trading at $56.47. Analysis posted.
12:40 p.m. New York time
I’ve rejected the three stocks I analyzed: MRK, WDC and NEM. The potential payoff in each case wasn’t worth the risk.
12:35 p.m. New York time
I’ve placed an order for short iron condors on XLB, short calls $59 and puts $53, and long calls $61 and puts $49. Asking credit: $0.48.
11:50 a.m. New York time
I’ll be taking another look at XLB as a prospect, as well as these higher implied volatility rank stocks: MRK, WDC and NEM.
By Tim Bovee, Portland, Oregon, May 3, 2019
4:30 p.m. New York time
My XLB order went unfilled. I was unwilling to lower my ask. Tomorrow, perhaps.
1:35 p.m. New York time
I’ve entered an order for a short iron condor on XLB, expiring June 21. The shorts are the $59 call and $51 put, and the longs are the $61 call and the $49 put. Asking for a $0.33 credit.
11:20 a.m. New York time
The exchange-traded fund XLB has reached the 30% implied volatility rank, high enough to be interesting. I’ll take a look at it as a potential trade today.
By Tim Bovee, Portland, Oregon, May 2, 2019
iShares U.S. Real Estate ETF (IYR)
Update 5/24/2019: Ninth try is the charm. I exited IYR after attempting in nine sequential market sessions to get a fill on my order at 50% of maximum potential profit, my exit target, with a bid price of $0.19. One sticking point was that a leg of the short iron condor had become valueless.
The fill came for a $0.19 return on the position. Shares were trading at $88.45 at the fill, up $1.35 from their entry price. The implied volatility rank declined by nine points, to 29, helping to bring the position to its profitable exit point.
The stock price meandered on a sideways course, reaching a high of $88.52 on May 16 and then exceeding that on the day my exit order was was filled, with a high of $88.56. In other words, it was a perfect short iron condor position: Little price movement, giving Theta time decay and a declining IV rank time to do their work.
Shares rose by 1.6% over 23 days, or a 25% annual rate. The options position produced a 100.0% return for a 1,587% annual rate.
I have entered a short iron condor spread on IYR, using options that trade for the last time 51 days hence, on June 21. The premium is a $0.38 credit and the stock at the time of entry was priced at $87.10.
The profit zone for this position is between $91.38 on the upside and $79.38 on the downside.
The implied volatility rank (IVR) stands at 35.
| Premium: | $0.38 | Expire OTM | |
| IYR-iron condor | Strike | Odds | Delta |
| Long | 93.00 | 93.0% | 6 |
| Break-even | 91.38 | 88.0% | 10.5 |
| Short | 91.00 | 83.0% | 15 |
| Puts | |||
| Short | 82.00 | 85.0% | 15 |
| Break-even | 79.38 | 88.5% | 11.5 |
| Long | 79.00 | 92.0% | 8 |
The premium is 15.2% of the width of the position’s wings.
The risk/reward ratio is 5.6:1.
By Tim Bovee, Portland, Oregon, May 1, 2019
Update 5/31/2019: I exited UNH 21 days prior to expiration, for a $1.64 debit, producing a $0.64 profit per share, with stock shares trading at $240.23, or $6.53 above the entry point. The exit came at 28% of maximum potential profit, below my 50% target. The implied volatility rank at exit was 37%.
Shares rose in two steps to a peak of $251.18 during my holding period, and then dropped off for a week as exit approached.
Shares rose by 2.8% over 30 days, or a 34% annualized rate. The options position produced a 39.0% return for a 475% annualized rate.
I have entered a short iron condor spread on UNH, using options that trade for the last time 51 days hence, on June 21. The premium is a $2.28 credit and the stock at the time of entry was priced at $233.70.
The profit zone for this position is between $260 on the upside and $210 on the downside.
The implied volatility rank (IVR) stands at 46.
| Premium: | $2.28 | Expire OTM | |
| UNH-iron condor | Strike | Odds | Delta |
| Long | 270.00 | 96.0% | 4 |
| Break-even | 262.28 | 87.5% | 13 |
| Short | 260.00 | 79.0% | 22 |
| Puts | |||
| Short | 210.00 | 84.0% | 14 |
| Break-even | 202.28 | 80.5% | 10 |
| Long | 200.00 | 77.0% | 6 |
The premium is 22.89% of the width of the position’s wings.
The risk/reward ratio is 3.4:1.
By Tim Bovee, Portland, Oregon, May 1, 2019
3:10 p.m. New York time
IYR Analysis posted.
3:05 p.m. New York time
My order on IYR has been filled.
1 p.m. New York time
I’m passing on my three remaining prospects — DVN, WDC and AKAM — without further analysis. They published earnings within the last day or two, and each has shown a sharp drop in implied volatility.
12:55 p.m. New York time
I’ve entered a short iron condor order on IYR.
12:30 p.m. New York time
UNH Analysis posted.
12:15 p.m. New York time
I’ve entered a short iron condor position on UNH. Full analysis to come.
So far in my screening I’ve rejected FB for being overly prone to headline shock, and NEM and MRK for having a high risk/reward ratio for any position structure that accords to my guidelines.
11:10 a.m. New York time
I’ll be looking at prospects again today: The stocks of seven companies that announced earnings in April and that this morning show high implied volatility (an implied volatility rank of 25% or higher).
The seven stocks are UNH, NEM, DVN, WDC, MRK, AKAM and FB. I’m looking at them as prospects for short iron condor options positions.
One point that’s an immediate deal-killer will be an ex-dividend date prior to my exit from the positions. The options expire June 21, and my goal is to exit no later than Friday, May 31.
By Tim Bovee, Portland, Oregon, May 1, 2019
2:05 p.m. New York time
I’m passing on all four of the potential trades I analyzed:
My present trading rules don’t set a firm cut-off for acceptable risk/reward ratio’s. So how high is too high? I’m playing it using the stomach-churn metric. Anything above 5:1 seems a bit scary to me — My $50 credit on a contract could produce a $250, and I get that strange uneasy feeling in my gut at the mere of thought of it. I feel more confident below 4.5:1, and turn cartwheels of happiness if anything gets below 3.5:1.
Scientific? No. Conducive to peace of mind? Absolutely. And even if that stomach churning feeling is produced by my subconscious, it’s a cri de cœur that I’m always inclined to heed.
12:45 p.m. New York time
I’ll be looking at these prospects today: XHB, GDXJ, XLRE and IYR.
By Tim Bovee, Portland, Oregon, April 30, 2019
SPDR S&P Oil and Gas Exploration and Production ETF (XOP)
Update 5/31/2019: I exited XOP when its price declined below the position’s profit zone, or the range between the two breakeven points of the short iron condor. My rules require a exit if the distance beyond the profit zone would require two days or more to return, using the 14-day average of the Rate of Change metric as an estimate of maximum speed. At exit XOP stood 2.2 days below the profit zone.
I exited for a $1.90 debit, $1.38 greater than the credit I received upon entering, with shares trading a $25.63, or $5.58 lower than when I entered the position.
XOP fell for three days while remaining within the profit zone, then traded sideways until a week before exit, when it gapped down below the zone’s lower boundary and continued to decline, gapping down yet again at the opening today, triggering the exit signal. The fossil fuel prices that underly the companies within the holdings of the exchange-traded fund fell for much of my holding period, and the final downward slide came in response to the Trump administration’s decision to place a 5% tariff on Mexico, which would add to the costs of U.S. refiners.
Shares declined by 17.9% over 32 days, or a -204% annual rate. The options position produced a -73% loss for a -828% annual rate. The implied volatility rate rose to 49% during my holding period.
I have entered a short iron condor spread on XOP, using options that trade for the last time 53 days hence, on June 21. The premium is a $0.53 credit, and the stock at the time of entry was priced at $31.21.
The profit zone for this position is between $35.53 on the upside and $25.53 on the downside.
The implied volatility rank (IVR) stands at 25.
| Premium: | $0.53 | Expire OTM | |
| XOP-iron condor | Strike | Odds | Delta |
| Long | 38.00 | 96.0% | 4 |
| Break-even | 35.53 | 90.0% | 10.5 |
| Short | 35.00 | 84.0% | 17 |
| Puts | |||
| Short | 28.00 | 81.0% | 17 |
| Break-even | 25.53 | 87.5% | 10.5 |
| Long | 25.00 | 94.0% | 4 |
The premium is 17.7% of the width of the position’s wings.
The risk/reward ratio is 4.7:1.
By Tim Bovee, Portland, Oregon, April 29, 2019
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