Meet Our Readers

Mark:

This email is in response to 'Real Life Iron Condor Trade' and 'Meet Our Readers.' This series of trades leads to the least common multiple of my present position in RUT.

I am interested in your (and possibly your readers') thoughts.

Not certain which way to express IC and DD trades, but I think this will be intelligible:

The trades

12/16 +20 RUT FEB IC 700/710/830/840 @ 3.50 credit
[On Dec 16, I bought 20 iron condors, collecting $350 apiece]

Concern begins developing over RUT gains, so I bought some insurance.

12/21 +1 RUT FEB C 800 @ 19.40

The cost of this insurance was to be offset by the sale of some 830/840 or 840/850 call spreads.

The market continued to rise and disagreed with me about the value of those spreads.

Ready to put more at risk

1/07 +40 RUT MAR IC 700/710/850/860 @ 3.50 credit

1/14 +50 RUT MAR IC 730/740/860/870 @ 3.57 credit

But not so thrilled with being short that much vega: Thus,

1/14 -10 RUT MAR P 740 @ 10.90

1/14 +10 RUT JUN P 730 @ 27.55

1/14 -10 RUT MAR C 860 @ 6.80

1/14 +10 RUT JUN C 870 @ 20.60

My thinking is that vega largely protects me on the present collapse in RUT price and so I have done nothing. Even so, the 740 strike looks painful. The plan is to begin selling delta and buying gamma somewhere between the 740 and 760 strikes, if RUT reaches 770. I'll try to slough about 60 deltas and snag a gamma for about $3,000. Once the 750 level is breached I shall need to buy 20-30 of the 740/730 spreads.

Below 740 would the time to consider unwinding the diagonals, and I am always looking to unwind the rest at good prices. The remaining reward for FEB is starting to feel small.

The real money (i.e., paying a debit) diagonal is new for me, but felt necessary for continued premium collection.

On 2/1 I was able to buy in 20 RUT FEB 710/700 P for 0.30 and happy to do so. Shortly thereafter (2/3) I bought to close, 20 RUT FEB 830/840 C @ 0.70 and also sold 1 RUT FEB 800 @ 9.00

On 2/3 I put on the new position: +20 RUT APR 730/740/850/860 @ 4.40 which (afterward) I notice has my positions bunched more than I would prefer.

On 2/7 purchased protection in the form of 2 RUT MAR 830 C @ 12.90

On Friday (2/11) I removed risk by purchase of 40 RUT MAR 710/700 P @ 0.40, but there’s still plenty of risk at the 830 strike.

906


If you want to share a trade, personal incident, or relate how you became an options trader, please send e-mail to blog (at) mdwoptions (dot) com.

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7 Responses to Meet Our Readers

  1. Mark D Wolfinger 02/19/2011 at 7:59 AM #

    You trade pretty big size to make a one-lot as an adjustment!

    My major comment involves the ‘vega’ problem. It’s true that owning the longer-term options add positive vega to your position. The one problem with paying a big debit for that vega is that it can cost a significant amount – if and when IV declines.

    Obviously an IV crush is good for your entire portfolio, when that crush occurs due to a dull (not bull) market. However, if we have a sustained – slow and boring – rally, then your upside is in jeopardy and so are the diagonals. My point is that you must be certain that your upside risk is (was) manageable.

    I agree that your April position used strikes that were too low – only because that Feb position was still open.

    I note that settlement (RLS) was over 838 yesterday and I’m wondering how well you handled that 830 line. I hope you didn’t hold as RUT moved to 834 on Thursday. The settlement price seems to be a bit high, but that does happen often.

    I understand how difficult it is to bite the bullet when you are so near to a big payday. However, if you closed everything before settlement, it should not have been too bad.

    • sandeep 02/19/2011 at 2:32 PM #

      Here is a link to an interesting article regarding RUT settlement.

      [MDW: Thanks for the link, but I will not give that organization an iota of publicity]

      sandeep

      • Mark D Wolfinger 02/19/2011 at 3:03 PM #

        This post has some good settlement information, but it does lack the numbers cited in your table.

        • sandeep 02/19/2011 at 7:13 PM #

          Thanks, that is an informative post. Sorry for the link – suffice it to say the take home lesson for me is that RUT and SPX options must be closed out by Thursday, and if they are so far from the strike that there is little chance they will get in trouble, they will be very cheap to buy back.

          s

          • Mark D Wolfinger 02/19/2011 at 8:08 PM #

            s.

            You just used an article written by a company that gives options a bad name, and I will not mention them.

            I’ve been saying that every time that I write about European style options. Holding into settlement Friday is a very big mistake.

            Regards

  2. sandeep 02/19/2011 at 1:03 PM #

    Mark,
    I am wondering about proper management of a multi-month calendar spread. I initiated the position in November with selling the Nov 40 call and buying the June 40 call. The stock price at that time was around $37 and i had a bullish bias. The stock has trended up and so far the Nov, Dec, and Feb calls that I sold have all expired worthless, though in Feb I increased my short strike to 41, and it closed just above $40 yesterday.

    So now my long June 40 call is in the money, and I will probably look to sell a March 43 call. My question is this – if my bias remains bullish, is the proper strategy to just keep holding the long June 40 call and keep selling short calls with higher strike prices, or is it smarter to just sell the June 40 call and initiate a new calendar at the 43 strike price (sell March 43/buy June 43)? In my studying of options I haven’t seen this topic discussed – but it seems to me that replacing the June 40 with the June 43 would lock in profit and reduce risk if the price goes down from here and is probably the smart move. Would there be any good reason to not do this? Thanks.

    sandeep
    .

    • Mark D Wolfinger 02/19/2011 at 2:59 PM #

      S,

      Because you have not seen this discussed, I think it’s worth a longer discussion. I’ll do that Monday (holiday) or Tuesday.

      Quick answer: I would NOT continue to hold the Jun ITM call. It has too much downside risk – and the market does not always do as you hope. I’d take the cash and then open a new trade that suits your bias.