Posted by: Tyson Heyn | October 4, 2009

Planning Ahead for the Week of October 5, 2009

The past week brought a tide of change to the stock market.  The “window dressing” that pushed stocks higher in the twilight days of September gave way to profit-taking and anxiety about future economic conditions in October.  So, what can we expect between now and October options expiration, just twelve short days away, and what does that mean for our October Long Iron Condor (LIC)?

First, the good news, which might push stocks higher:

1) Earnings.  Yes, it’s earnings season already.  Look for results from Alcoa, Mosaic, and Yum! Brands–among others–to potentially reassure investors that profitability is still in vogue and keep us from having to exit the put side of our LIC.

Daily Reading of the NYSE McClellan Oscillator

Daily Reading of the NYSE McClellan Oscillator

2) Oversold conditions.  If you look at $NYMO  (see right), we are heavily oversold, reaching levels (-80) not seen since late June and early September.  In both cases, the market quickly rebounded, which will hopefully buy us enough time to maximize profitability for our LIC.  Further, we’ve had a weekend for nerves to settle and have plenty of money coming in from 401(k)s and related ‘automated’ investments that needs to be put to work, given that the market is now 6% off highs from two weeks ago.

 3) Historic strength of October.  Contrary to the perceptions of many investors, October typically is a very bullish month and serves as the gateway to a six-month rally that lasts through April.  Further, it has been the best performing month for the S&P 500 since 1993, excluding the aberration of 2008.

However, the market does roll over soon, I plan to buy/close the sold 100 and 99 puts at their respective market prices and ride the corresponding puts that I have purchased for as long as possible, should things continue to deteriorate.

CURRENT POSITIONS

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

A 100/98 put spread, originally priced at a net credit of $0.16 and now worth $0.43–a 15% loss.  (22% of Oct. LIC)
A 100/97 put spread, originally priced at a net credit of $0.39 and now worth $0.58–a 7% loss.  (17% of Oct. LIC)
A 99/97 put spread, originally priced at a net credit of $0.40 and now worth $0.34–a 4% profit.  (9% of Oct. LIC)
A 113/110 call spread, originally priced at a net credit of $0.16 and now worth $0.10–a 4% profit.  (29% fo Oct. LIC)
A 112/111 call spread, originally priced at a net credit of $0.29 and now worth $0.03–a 35% profit (23% of Oct. LIC)

October 2009 SPY Long Iron Condor

October 2009 SPY Long Iron Condor

That puts overall profitability for today at 1%, possibly 6% if SPY moves back to around 105.  (This comes after cashing out the 116/113 call spread for a profit of 8% for the capital involved–or 2% of overall profitability.)  Peak available profitability for this LIC stands at 20% on October 17, assuming we can remain between 100 and 110 by then.  (22% total including the 2% already realized.)  There is only a 2% chance of closing at or above 110 (outside the second deviation of probability), so the primary focus is on downside risk.  Currently, a 23% probability remains that the market may close at or below 100, just within the standard deviation through this time period, which currently stands at 99.13.

For those who are interested, the current annualized yield for this sort of condor is 604%–skewed considerably higher due to the fact that pricing has moved away from the center of the LIC at the moment.  On a $100,000 investment in this LIC, you’re earning just over $730 a day in time decay, including weekends.  Still the best money you can earn in this environment.

As usual, watch for updates and commentary during the week by following me on Twitter.
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Categories

%d bloggers like this: