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RUT Feb’07

Published on January 9, 2007

RUT Feb’07

January 9, 2007

For the month of Feb’07, I am looking to open another RUT IC i.e. 830/840/730/720 for $2.20-$2.30. My short strikes are 1 std dev away and the possibility of this IC expiring worthless are 89% on call side and 83% on the put side.

Here is the risk/reward graph: Reward $230/Risk $770 per leg. This translates to about 29.8% returns for 5-6wks holding period.

Feb'07 RUT IC New

19 Comments

  • Avatar optionpundit says:

    I was filled for this trade at $2.30 and my risk is $7.70. I have my adjustment plans ready as and when it is about to reach any adjustment points.

  • Avatar optionpundit says:

    As on Jan 16th am, the IC is selling for $1.90. I have already collected $0.40 out of $2.30 credit (i.e. 17% of my overall credit).

  • Avatar mlsrini says:

    Hello Mr.Pundit,
    Do you usually play the RUT IC 5-6 weeks in advance?

    Thanks for the wonderful compilation of information in your site.
    Thanks,

  • Avatar optionpundit says:

    Thanks for the compliments mlsrini.

    Yes, generally I look for 5-6 weeks to the expiration.

    Thanks,
    OP

  • Avatar mlsrini says:

    Mr.Pundit,
    The pics you have with Mr.Buffett, how did you meet him? Do you follow any of his principles (value investing by investing in undervalued assets)?

    Thanks,

  • Avatar optionpundit says:

    mlsrini,

    I was part of a student group, during my MBA at University of Texas. We went to omaha, Mr Buffet’s head-office, had lunch with him, chat as well as have a Q&A. It was such a memorable day. I have a mixed trading style, and thefore part of my trades are value trades, while mostly I am an option trader.

    Profitable trading,
    OP

  • Avatar optionpundit says:

    As of Jan 19th (Friday) this Iron condor was selling for only $1.00. Within 7-10 days of opening this trade I have already collected $1.30 out of $2.30 credit (i.e. 56% of overall credit). I shall look to next week on which leg shall I close if needed.

  • Avatar optionpundit says:

    As of Jan 24th, I am selling the bull put leg for $0.25 cents/leg. Currently the whole condor is selling only for $0.65, which means I have collected $1.65 out of $2.30 already. That is 21% ROM already.

  • Avatar Bill says:

    How did you figure the possibility of the IC expiring worthless at 89% on call side and 83% on the put side when you are 1 SD away from the market when you put on the position?

  • Avatar optionpundit says:

    Bill,

    There are coupls of ways to estimate probability. I use delta a gauge of probability.

    Std Dev will also depend on which volatility do you use to calculate. Once approach is to use ATM Volatilty, other approach is to individual options’s volatility and that’s what create a different graph vs a simple standard 1 sigma calculations.

    Profitable trading

  • Avatar optionpundit says:

    I bot the BCS leg for $0.25 as well. With this I collected $1.80 on $7.70 margin. That’s 23.4% ROM.

    Cheers,
    OptionPundit

  • […] I decided to buy back my bear call credit spread of $830/840 for $0.25 and release the margins. This bring my obverall profit from this trade which I originally initiated from past sevral months (find this link for 1st trade) are 88% and for the new feb trade (click here to follow discussion on 2nd trade) are 23.38%. […]

  • Avatar Edge says:

    What software are you using for the risk/reward graph?

    Also, are you using the ATM implied volatility for the std dev?

    Thx.

  • Avatar Bill says:

    I see what you are saying, your short call had a delta of .11 and your short put had a delta of .17 when you entered the position.

    Decent probability, not so good risk/reward. How do you plan on managing the position once the market makes a good move towards one of your shorts?

  • Avatar optionpundit says:

    Edge,
    I am using ThinkOrSwim (they are my preferred brokers). There are several options analysis software available in the market i.e. OptionVue, Optionectic’s etc. I don’t use ATM volatility. It’s the volatility of the short strikes in general.

    Bill,
    Risk/reward, I think is a personal matter of choice. What maybe a good risk/reward for someone who plays CTM Iron Condor maynot be a good Risk reward for FOTM Iron Condor trader. I prefere something in between. Now for adjustments, there are a lot of scenarios available. For instance, you may choose to completely take out the position, you may “shift the IC”, you may convert into a Iron butterfly, or convert into “micky-mouse” as Dan calls it. Several ways. It depends!

  • Avatar 3heart says:

    Mr. Pundit,

    How do you hedge a Black Swan event such as 911 for this kind of trade?

  • Avatar optionpundit says:

    3heart,

    Based on my current knowledge, I don’t think I can save myself from that sort of event if the market gaps down beyond my break even points.

    On Sept 10, RUT closed at $440.73, on sept 17th, it opened at $440.73 and closed at $417.67. If we look at this incidence alone, I think I could have still gotten out without losing lot of money.

    Net, if the market gaps down into beyond my longs, I may lose most of the capital on this trade.

  • Avatar 3heart says:

    Really? on 9/17/01 it opened at the same point as 9/10/01 close??

  • Avatar optionpundit says:

    At least that’s the way I am seeing on the charts. I see the same thing for SPX as well.
    I see it different for NDX, a gap down of nearly 100. Check it out.

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