I feel Helen Reddy’s statement sums our SPX Iron Condor position best, “Hindsight is wonderful. It’s always very easy to second guess after the fact”. The underlying SPX is well within our chosen range with only 6 full trading days left (SPX is a European style option) until options expiration. Unfortunately, when the SPX raced down towards our short strike we decided to take off the spread for a loss. I am not upset by this decision as it was the prudent decision for risk management reasons. However, I am upset at myself for not rolling down at the same time we took the positions off. Yes, the market could have raced lower even further, potentially breaching our new short strike, but I would have taken precautions to minimize risk (and another 5% lower would have been highly unlikely).
The market had just experienced it largest loss in over 4 years so I wanted to evaluate the current situation before I was willing to add downside risk to the position. SPX was moving 30-40 points in one day so a decision to add put spread allowing for a 70 point downside looked risky at the time. Again, I took off the put side to eliminate all downside risk and adding another put spread would have created downside risk once again. Had I added another position and the market continued to tank my decision to add another put spread in the strategy would have looked foolish to many. Risk management is the most important aspect of the Iron Condor strategy. April’s loss taught a valauble lesson and one that we will not allow ourselves to repeat. As the old cliche goes, hindsight is 20/20.
Over the past few weeks there have been several opportunities to bring in more premium, yet I have been uncomfortable with the current risk. At this point it could be tough to bring in decent premium, but a fairly sharp move to the downside could allow us to bring in roughly $.30 to $.50. This would decrease our loss for the August cycle. Hopefully, the market affords us the opportunity over the next day or so.
One thing is for certain, our Expiration Report will have some interesting information for our subscribers. Expiration cycles like this are extremely educational and very insightful for the future.
Overbought/Oversold for August 8, 2007
SPY - 62.6 (neutral)
IWM - 63.2 (neutral)
DIA - 64.1 (neutral)
QQQQ - 60.8 (neutral)
GLD - 60.5 (neutral)
OIH - 53.1 (neutral)
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Andrew Crowder, www.crowderinvestments.com