Posted by: Tyson Heyn | September 2, 2009

Update on Long Iron Condor Positions

Aggregate of October and November 2009 Long Iron Condors for SPY

Aggregate of October and November 2009 Long Iron Condors for SPY


It has been a wild week for the market, but our bet on the S&P 500 tracing lower has paid off as the October and November Long Iron Condors bounced from one side of the peak profitability bubble to the other.

As of now, we’re up 5% since the initial establishment of the October (August 14) and November (August 26) condors. More importantly, we remain within about one point of peak profitability.

Individually, the October condor is up about 9.5% while the November condor is up about 3%.

On the call side, there is not much worry: both upside spread curbs (106 for October and 109 for November) are outside the first standard deviation of potential market trajectories. Personally, I don’t have a stop loss on these at this time, simply because I have doubts about a spontaneous 6% market rally occurring before I have a chance to get to the computer in the morning.

On the put side, I’m a little more cautious. I’m tentatively holding stop limits for the sold puts at 98. In a perfect world, I’d buy those back early in the day and/or week and then try to ride the purchased puts as the market moves lower. This, of course, is risky, and requires strict supervision of minute-by-minute market conditions, with plenty of trailing stops set to cover potentially sudden changes in momentum.

Financial Armageddon: The Argument in Favor of Buying Back Sold Puts First

Financial Armageddon: The Argument in Favor of Buying Back Sold Puts First

To help explain why I favor a two-part breakdown on the put side in case of a market collapse, consider the following scenario, assuming the sold puts were repurchased today at current levels:

Should SPY move to 95, an immediate 63% profit would result. At 92, a 100% profit is realized, and 200% total profit is found at around 86.25–close to the recent market bottom in July. Sure, the odds are against such a dramatic and profound move, but there are a lot of perma-bears out there who will argue that such a scenario is rather plausible for any number of reasons.

That’s it for tonight. Watch carefully on Friday during the jobs report. If things don’t melt down, enjoy the earnings from time decay (theta) over the long weekend.

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