Posted by: Tyson Heyn | September 26, 2009

Planning Ahead for the Week of Sep. 28, 2009

What a week it has been!  I’m somewhat stunned that my predictions for the past week were so accurate.  (See here.)  To recap, I was expecting an opportunity to move out of the November Long Iron Condor (LIC) as the market moved temporarily lower. 

My target date for a significant market reversal was Thursday, September 24, and that’s exactly when it arrived.  In the interim, I’ve re-invested the proceeds of the November LIC into additional October LIC positions, which will be detailed later in this e-mail.

SPY Performance -- November 2008 - Present

SPY Performance -- November 2008 - Present

Heading into the week of September 28, there are some interesting choices that the market will be making.  Here’s a recap of the possibilities.

A key resistance level on the SPY is right around 103.9–it matches up with August highs and provided support twice earlier this month.  It’s also near the bottom of the current wedge we’re in.  See chart on right for details.

So, if we do move past 103.85 next week, I will most likely buy back the sold puts at 101 (SWGVW) and ride the bought puts at 98 (SWGVT) as the market moves lower, keeping a tight stop on selling the second leg of this position in order to maximize profits.  (I’m thinking a $0.05 trailing stop, which would give up $500 on 100 options but provides enough latitude to allow a significant move lower.)

The market can, of course, also move higher for a number of reasons.  First, the “buy the dip” crowd may re-emerge after a weekend of sobriety.  Also, it’s end of quarter, and many institutional folks may be eager to play catch-up in their holdings as client reports are about to be generated.  Additionally, Yom Kippur traditionally marks the beginning of a mild bullish slant to the market.  Finally, aside from Wednesday, every day of the week holds a historically bullish slant, offering a daily probability of 57% (Thu.) to 66% (Tue.) of moving higher.

CURRENT POSITIONS

To consolidate the Twitter-based updates from the past week, here’s where things currently stand:

A 95/92 put spread, originally priced at a net credit of $0.62 and now worth $0.12–a 19% profit.  (22% of Oct. LIC)
A 101/98 put spread, originally priced at a net credit of $0.43 and now worth $0.51–a 5% loss.  (27% of Oct. LIC)
A 116/113 call spread, originally priced at a net credit of $0.20 and now worth $0.07–a 3.5% profit.  (24% fo Oct. LIC)
A 114/111 call spread, originally priced at a net credit of $0.46 and now worth $0.21–a 8.5% profit (8% of Oct. LIC)
A 112/111 call spread, originally priced at a net credit of $0.27 and now worth $0.10–a 19.5% profit (17% of Oct. LIC)

October 2009 Long Iron Condor of SPY

October 2009 Long Iron Condor of SPY

That puts overall profitability for today at 7%, possibly 8% if SPY moves back to around 106.  Peak profitability for this LIC remains around 18.5% on October 17, assuming we can remain between 101 and 110 by then.  The nearest short-term threat is the downside risk of the 101/98 put spread, which I’ll be exiting if SPY reaches too far below 104–again, my tentative trigger is 103.85.  The upside risk is minimal at the moment, but I’d re-examine things if SPY shot up to 108 or so.

For those who are interested, the current annualized yield for this sort of condor is 321%.  Of course, we can’t maintain all condors through options expiration every month, but it’s a nice, aspirational target that isn’t reliant on market direction.  On a $100,000 investment in this LIC, you’re earning just over $400 a day in time decay, including weekends.  And that’s the kind of dividends that I’m happy to be invested in.

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Responses

  1. Tyson
    Are you holding Long Iron Condors instead of short IC’s because of the relatively low IV on the SPX or SPY?

    Thanks, Mitch

  2. Hey, Mitch,

    Yes, exactly. With short ICs, I have to sit around and wait for the market to move in order to make money, and in the interim, I’m losing value in my investment due to time decay.

    I like short ICs and their strangle/straddle counterparts for individual stocks when I expect a big move either direction–RIMM earnings in the past week would have been an ideal candidate.

    Generally speaking, the volatility in SPY is relatively contained–I most likely won’t wake up tomorrow and witness a 10% gap in the tape. So, I’m more comfortable managing from a containment perspective.

    If I do anticipate a considerable directional move in a LIC, there’s a way I can leg out of it in order to profit from the change.

    For instance, I think that 103.85 is a significant support level for SPY right now, and if it moved lower than that, I will first buy back the puts I sold on the stock.

    Now, I’m set to profit from every point lower since I’m still holding purchased puts that rise in value as the market drops.

    The trick is to tightly manage my position in those purchased puts–as soon as the momentum reverses, I have to sell/close those puts in order to realize the additional profit I just made. So, tight stops are key.


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