Posted by: Tyson Heyn | October 11, 2009

Planning Ahead for the Week of October 12, 2009

The past five trading days were a mirror image of the week prior–instead of fearing a market pullback, we transitioned to a very bullish outlook by Friday.  In my last update, I mentioned a number of factors that could introduce renewed market confidence, and most or all of them did indeed contribute to the reversal we just witnessed. Now, instead of worrying about an impending market drop, we’re looking at upside risk as options expiry week begins.

OPTIONS EXPIRY WEEK GAMEPLAN

At face value, we look well positioned to ride out the end of the October Long Iron Condor (LIC) without having to close either of the call- or put-side spreads (legs).  After all, the set of calls @ 110 that we’ve sold are outside the first standard deviation, assuming a volatility all the way up to 20%.  That translates into a mere 12% chance that we’d find the 110 calls exercisable at the end of the week.

However, the standard deviation belies the market’s momentum, which has been steadily up for the past five days.  If you’re into daily MACD histograms, we’ve just passed an inflection point that could lead to continued upside in the market.  Further, SPY rose 4.2% in the past week, and while a repeat performance is arguably unlikely, we only need to see a bullish push at 60% of last week’s strength (2.5%) in order to reach 110 by options expiration.

So, while I’d love to play the odds and ride through the next week without closing my call spread, I don’t want to jeopardize my profits, especially when the ‘real life’ odds are arguably less advantageous than what the computer spits out. 

I’ll be watching to see how my resistance level of 108 holds and whether we can stay under that level (I hope it does!), and if it is indeed broken, I’ll watch to see how quickly that will occur.  Roughly speaking, the break-even levels for the call spread of this LIC are 107.65 on Monday, 108.05 on Tuesday, 108.45 on Wednesday, and 108.85 on Thursday. 

I will not hesitate to pull the trigger and break down the call-side spread if/when a) SPY sustains itself above 108 and/or b) there are no indications early in the week of profit taking or a re-emerging bearish sentiment.  Our best hope for a market retracement is a stronger dollar, which seems to be the only catalyst that effectively pushes stocks down nowadays.

Also of note this week:

MONDAY: History tells us that the eighth market day in October is most likely down, but the bulls might have something to say about that.  Expect volume to be light with Columbus Day being observed in the U.S. (how are we supposed to celebrate that holiday, anyhow?), which has played to the longs’ benefit in recent months.

TUESDAY:  A historically bullish day.  Intel and Johnson & Johnson report earnings.  I might be willing to wait until here to see if either disappointing financials or a stronger dollar helps the market take a pause.

WEDNESDAY:  Another historically bullish day, highlighted by J.P. Morgan’s quarterly results and the release of various macroeconomic data from the government.

THURSDAY:  Results from Citi, Goldman Sachs and Google.  By now, I’ve either broken down the call-side spread or am seeing SPY remain under 109.

FRIDAY:  GE and Bank of America Results.  As an options expiration Friday, there’s about a 50/50 chance of being bullish/bearish, historically speaking.

For what it’s worth, about 64% of the last 30 October options expiry weeks have seen overall market gains.

For the November LIC, I don’t plan adding to the position anytime soon unless we see a spike in volatility.  Both options expiry week and the succeeding week tend to see deflated options pricing, so it’s better to wait for conditions to improve in late October.

CURRENT POSITIONS

October 2009 SPY Long Iron Condor

October 2009 SPY Long Iron Condor

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 $0.03–a 6% gain.  (19% of Oct. LIC)

A 100/97 put spread, originally priced at a net credit of $0.39 and now worth $0.04–a 13% gain.  (38% of Oct. LIC)

A 112/110 call spread, originally priced at a net credit of $0.16 and now worth $0.15–a 0% profit.  (38% fo Oct. LIC)

A 112/111 call spread, originally priced at a net credit of $0.45 and now worth $0.05–a 12% profit (3% of Oct. LIC)

That puts overall profitability through today at 9%, possibly 11% if SPY moves back to around 106.  Peak available profitability for this LIC stands at 14% on October 17, assuming we can remain between 100 and 110 by then.  (23.7% total including the 9.7% already realized.) 

For those who are interested, the current annualized yield for this sort of condor is 837%–higher than normal due to not being delta-neutral and that there will be a lot of time decay (theta) in this options expiry week.  On a $100,000 investment in this LIC, you’re earning just over $1,240 a day in time decay.  Not too bad.
November 2009 Long Iron Condor

November 2009 Long Iron Condor


I’ll talk more about the November LIC next week, but it’s pretty much on the back burner as I simply try to close out the October LIC as profitably as possible.  For what it’s worth, this LIC is already up 2% since inception last week.

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

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