The Firesauce.com

Upper Leg Close

Step 1 of July’s strategy worked out nicely.  I was able to book a 10% profit by selling out of the 710/720 Bear Call Credit Spread for .$05 per contract.  If you recall, the initial credit on the 710/720 Bear Call was $1.05 per contract for a 10.5% potential ROI.

Step 2: Roll out the 690/700 Bull Put spread to August.  With RUT trading below 600 today, who knows when that will be.

(RUT to 700, STAT!)

Lower Leg Roll Down & Out – Update 7/7

Managed to roll down and out from July 690/700 Bull Put Credit Spread to an August 680/690 Bull Put at a debit of .95 per contract.  With RUT still trading around 600 still today, there is no viable spread above 690 to consider opening a bear call credit spread.  Will just have to wait and see if RUT pushes back up.

Decided to move to a July 10 point spread! Yes, only 10 points.  Traditionally I would do 100 points or higher, but I don’t expect the Russell to go up significantly over the next month due to sell in “May & go away” tradition.

I ended up with a July 690/700 – 710/720 Iron Condor.

Net Debit of 1.45 since I rolled down and out from a June Bull Put Credit Spread of 710 / 720 to a July Bull Put Credit Spread of 690/700.

My strategic goal for this month is to reach near max profit of 10.5% on the Bear Call and roll down and out to an August Bull Put.

I got manhandled by the pullback.

Current position is a 720/710 June Bull Put spread. Waiting on an opportunity to roll down and out to a 700/690 July Bull Put Credit Spread.

Ended this month the same way as Mantis. Closed out my lower wing (670/680) in case I needed to move my upper wing, sat on the upper wing and let it settle on Friday. Final numbers for this month:

Daily P/L:  4.55%
Month to Date:  41.25%
Year to Date:  13.89%

Of course the money hasn’t posted to my account yet, so I haven’t opened my May IC yet. Hopefully on Monday.

For my April RUT Iron Condor spread (630/640 – 730/740), everything was running like a well oiled machine until the final week when the RUT decided to go on a bull run.  The RUT closed at 723.57 on Thursday. It became too late to close the upper wing, so I decided to cross fingers hoping that the RLS wouldn’t open above 731.5 which is breakeven for this month.  The RLS settled at 723.56 so the options expire worthless, and we experience max profit… well almost max profit, I did buy back my 640 puts for a nickel so I could adjust the 730 wing if it became absolutely necessary.

Now on to May’s Iron Condor.  The RUT was trading around 724 when I opened the trade on 4/15/2010.

Buy 660 Puts @ 3.22
Sell 670 Puts @ 4.11
Sell 770 Calls @ 2.24
Buy 780 Calls @ 1.33

• Net Credit: $1.80 per share or $180 per contract (each contract is 100 shares)
• $1000 margin requirement per contract
• $180 / $1000 = 18% return on investment
• Total potential loss of $820 ($1000-$180) per contract

May’s initial credit spread has a 75% probability of success based on a probability calculator provided by my broker.  Upon settlement of April’s worthless contracts, I may open a new position in a week for a smaller profit, but higher probability of success.

I’ve been running Iron Condors on the RUT too, starting last month. Of course, with the market’s explosive upward movement I managed to get completely overrun and had to roll out my position to avoid a total loss. Unlike Mantis, who has a completely normal IC going right now, I’m sitting on a wonderful 680/730 IC, so I will be hosed if the market goes bearish. Hopefully we see a bit of resistance at 700 but no real downturn over the coming weeks. Once I’m able to recoup last month’s losses, I can set up a normal IC for May. But that’s a month away, so we’ll have to take it as it comes.

I’ve decided to post my monthly RUT strategy along with any adjustments that need to be made.

For the April expiration, I opened an Iron Condor (IC) on the RUT.  What is an Iron Condor? Its a combination of a Bear Call credit spread, and a Bull Put credit spread.  You can google it for more info on the strategy.

What is the RUT? Russell 2000 Index is a cash settled index that is settled based on the RLS ticker on final expiration day. RLS represents the opening trade of all the stocks on the RUT on expiry day and is usually settled after about an hour.

Now that the basics are out of the way, here is my April Iron Condor with real money. RUT was trading around 675 when I opened the trade on 3/17/2010.

Buy 630 Puts @ 3.12
Sell 640 Puts @ 4.11
Sell 730 Calls @ 1.19
Buy 740 Calls @ .68

Net Credit: $1.50 per share or $150 per contract (each contract is 100 shares).

$1000 margin requirement per contract.
$150 / $1000 = 15% return on investment, total potential loss of $850 ($1000-$150) per contract

When I opened the Iron Condor, the probability that the RUT would stay between 640 & 730 was 76%. As of the time of this post 5 days later, the probability has increased to 80%. Probability is calculated based on current price, time remaining till expiry, and volatility.  Its a tool provided by my broker.

There you have my first IC.  If I need to adjust because the RUT is getting within the danger zone I’ll post that too.  Otherwise hope to see you around April expiry as I post my May IC.

Over the last year, I’ve been playing around in the market. Stocks are fun but options and margins are where the real fun (read risk) is at. I’ve had my rear handed to me for the most part. Losing real money over the last year has taught me more than just messing around with a virtual account. But now I’m trying a new strategy in net credit Iron Condors on the Russell 2000. As long as its managed, it gives you the opportunity to get cash up front, and move your positions if the situation gets hairy. Let’s see what the next year brings.