August 24, 2017

Expected Bounce Leads to….? Iron Condor Adjustment

The anticipated short-term oversold bounce occurred today and has pushed all but one (IWM) of the indices we follow back into a neutral state. As I mentioned last week, extremely oversold conditions coupled with short-term seasonal winds were due to blow in Monday and Tuesday and should lead to a decent bounce. They blew in and yes, the indices advanced. That being the case we could see some follow through tomorrow, but I have a nasty feeling that we will see the recent lows in the not-so-distant future. Remember, the gap from 4/3 and 4/16 are not yet closed and unclosed gaps when approached again tend to weigh down the market. Time will tell.

If the market happens to retest the recent lows this would not be out of the ordinary. Typically, when we have a correction of any magnitude the lows will be tested within a few weeks, so expecting it would be the conservative approach. Everyone seems to be paying close attention to the 1490 area of the S&P (SPX). If we see the S&P (SPX) reach this level while simultaneously moving into an overbought state then I expect to see some short-sellers step in, halting any bullish attempts, at least momentariliy. How powerful the selling is anyone’s guess, just be aware of the situation if it indeed comes to fruition.

We exited the short put spread in our Iron Condor for a loss today eliminating any downside risk, at least for the moment. I say for the moment because I intend on adding another put spread in the coming days which will bring in more premium and as a result, decrease our loss even further. Moreover, we have the ability to roll our call spread down which will also bring in more premium and will bring our August SPX Iron Condor position closer to breakeven. The VIX is over 20 and so premium is very high right now (in comparison to the average over the last few years) so the aforementioned scenario looks good. Subscribers can read all of the details on the Insider’s/Member’s page of the website under the Condor Trades section/ August Cycle Adjustments.

The one thing that Iron Condor strategies cannot handle is quick decline/advances. We witnessed the largest decline in over five years last week and yet our range was still in tact and our short put strike was not breached. Coming into this week our goal was to adjust our position for capital preservation reasons. A decent gap lower would bring our position into max loss territory so we decided to err on the side of caution. We have no qualms taking a loss in the strategy, particularly in this situation. It is taking significant losses that truly effect the strategy or any strategy for that matter. This is why capital preservation techniques and more importantly, position sizing are such an important factor when implementing options strategies into any portfolio.

In April we went with a 100 point range which was not nearly enough. Since then we have opted for ranges of 140-180 and have been very successful. The large range worked again this month, as it allowed us to adjust our position for a loss which could potentially lead to  a break even August cycle, although that will depend on how much premium we can bring in and of course how the underlying acts. Once we add the put spread back on, the Iron Condor is back in play and the underlying SPX breaching the short put strike will once again be a concern. As I stated, if you are interested in what we have planned in the strategy please go to the insider’s/member’s page of the website. It is times like these where we all learn the most. Take advantage.

Overbought/Oversold levels for July 30, 2007

  • SPY – 32.6 (neutral)
  • IWM – 26.0 (oversold)
  • DIA – 31.1 (neutral)
  • QQQQ – 35.7 (neutral)
  • GLD –  37.7 (neutral)
  • OIH – 39.5 (neutral)

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