A Live, Experimental Trade for Oct 2008

I recently posted an iron condor trade that was experimental in nature for me.  It worked well and the position was closed 8 days later.

The experiment:  Buy an iron condor 5 weeks before expiration.  Plan to hold 14 days, or perhaps until the following Monday.  Then close the position when it meets either its predetermined profit or when the loss reaches the maximum acceptable loss for the position.

My usual inclination is to manage the position on its current merits (daily) and close when I feel that it's the right time.  As an experiment, I'm looking at targeting relatively high returns when holding positions for a short time.  If successful, this represents a good method for reducing risk because I would hold the position for two weeks and be out of the market for three weeks, or 60% of the time.  Being out of the market reduces risk to zero.

I have no intention of using this method exclusively, but if it works for me, I'd devote a portion of my portfolio to this strategy.

Goal: Find a RUT iron condor that expires in October.  I'd like the premium to be more than $3.00, but I also want to feel comfortable with how far OTM the options are.

RUT is currently 723.

I bought the Oct 650/660P; 780/790C iron condor and collected $2.95.  My goal is to cover by paying $1.90, two weeks from today. 

Margin requirement: $705.  Target profit: $105 ($98 after commissions).  That represents a 14% return on investment (margin) in two weeks.  Those returns are not handed out generously by the market, and this is a high risk strategy.

The maximum acceptable loss is about 25% higher than the target profit, or $1.30.

RVX (the equivalent of VIX for RUT options) is 29.23, so let's follow the implied volatility of this index and see if that affects our trade.


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