Posted by: Tyson Heyn | September 11, 2009

Oct. $SPY Condor Adjustment

 

October 2009 $SPY Long Iron Condor

October 2009 $SPY Long Iron Condor

I’m not a big fan of adjustments to existing condors, but given the straight, six-day rise in $SPY, I think now is a good time to take preventative measures as technicals point to a potential breakout for the index.

In brief, I’m rolling the call side of this long iron condor from 106/109 to 109/112, taking a net debit of $1.06 on the former and net credit of $0.53 on the latter. This leads to a near-term loss of 5% but overall gain of 17%.

I still look to hold this position through the end of September, at which point I’ll tighten my stop losses considerably in order to lock in gains.  My only stop loss, at the moment, is to buy back the sold puts at 101, at which point I plan to earn extra income in the (very) short term by delaying the sale of the purchased puts for this condor.

RATIONALE

Historical Performance, S&P 500As you can see from this chart, we’re approaching the same price level as the bottom of the October 2008 gap in the S&P 500.  Technically speaking, this is the last significant near-term resistance level for the index before “clear blue skies” up above.

One of two outcomes will occur:

a) The market “bumps” its head on the resistance and stays below it.
 
b) This resistance level is overcome by market forces, at which point we’ll most likely see a considerable rally.
 
Given the slight pullback of today’s market ($SPY down $0.49 as of this writing), now’s a great time to re-adjust targets.  Since all sales and purchases–both opens and closes–are taking place at the same time, the affect of volatility on pricing is negligible.
 
CONCLUSION
 
With this additional 3% in buffer, we should be OK through the end of the month.  One standard deviation from current $SPY levels reaches to 99.55 and 108.21, while the probability of ever touching 109 is calculated to be 19.6%.  Probability of finishing above 109?  11.9%.  Peak profitability on September 30: 36%.  Those are probabilities that I can live with quite comfortably.
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