This is shaping up to be a nice week for market-neutral traders like us. Yesterday was one of the most boring days in a long time, and today looks like another modest flat/down day. There is no significant economic news coming today, Europe has nothing to report and Hong Kong markets are closed today. Housing troubles are contributing to a lack of positive sentiment - it’s interesting that without merger news, significant bond movement, or other economic stimuli, markets don’t seem to have anywhere to go.

This lack of major movement is extremely welcome after the huge swings we’ve seen over the past couple weeks. We still have over 4 weeks left before July expiration, and flat/down days like this are actually ideal for us.

Portfolio updates:

• Our IWM position is in great shape. With the index down $0.50 as I write, it is almost exactly in the middle of our range. Small caps have been consistently underperforming vs. large caps recently, so we have every reason to expect a good outcome for this trade.
• Our SPY position is also looking good. Again, on today’s further weakness we’re nearing the middle spot of our trade. For the SPY to violate our short strikes it will have to move over 2.3% in just a few weeks, which is certainly possible but increasingly unlikely.

We are considering taking another round of contracts to develop our positions further, and members will receive updates immediately as they are posted.

On Thursday, June 8th, the CBOE Volatility Index (VIX) closed at 17.06, just a few ticks off its high for the day, and 28.3% higher than where it started the week. On Thursday, we also sent a couple trade alerts to our members; while there was a general retail stampede out of equities (call it profit-taking if you must, or if you work for CNBC, WSJ, etc.), we decided - ever the contrarians - that it was the perfect time to put on some new positions.

Friday proved us right. Consider:

You see that dip back down on the right edge of the chart? That’s yesterday - the VIX fell 12% or so, more or less back to where it was at the close on Wednesday. In other words, everybody panicked on Thursday, and then decided to chill out yesterday: “Oh, wait, things aren’t as bad as we thought…let’s have a hundred-and-fifty point Dow rally!”

Why does it matter that we got our orders out on Volatile Thursday? Well, when implied volatility (which is what the VIX measures) gets a big boost across-the-board, it pumps some extra value into options premiums. That’s absolutely fantastic for us, since it allows us more room to move, and makes our positions more profitable.

Example: the SPY iron condor we put on for July is considerably wider than the one we did for June. For the July trade, we have a full 8 points between our short strikes, whereas our June trade was only 5 points wide in the middle. Now normally, that 3 point difference would have a huge impact on the price of the spread - those extra 3 points of protection would cost you dearly, slashing the premium you’d receive for the spread. But because of the implied volatility boost on Thursday, we opened our July trade for only $0.10 less than we did our June one. Incredible!

And that, you see, is why we grab volatility premium whenever we can.

A couple of you wrote in about our two trade alerts yesterday to ask about getting orders filled. CT asked me to provide some general guidelines about how we handle order entry and execution:

1. We don’t send an alert unless we’ve filled the order, at our price, by at least one (and usually two) retail brokers.
2. Our recommended limit price is always exactly at the middle of the current bid/ask spread at the time of writing; this helps increase the chances of filling the order.
3. Always assume a $0.05 range in either direction from our limit price - especially in faster-moving markets, a lot can change even in 15 minutes, so if we publish a trade to sell at $0.90, anything from .85 to .95 is theoretically fair game. This nasty fact of life is called “slippage,” and one major reason we trade ETF products like SPY, IWM, DIA, etc. rather than open-outcry products like SPX, OEX, RUT, etc. is to reduce the impact of slippage.
4. All trade alerts should be entered as Day Orders, never as Good-till-canceled (GTC). That’s just because a lot can change overnight, and you don’t want your broker filling your order at 9:31 for a dime less than you could have gotten just because the order was still live. Instead, if you don’t get filled one day, after the market has been open for at least 12 minutes, re-enter your order. Since iron condors don’t shed the bulk of their time premium until very late in the expiration cycle, you won’t lose anything by waiting for the order to come to you.

As always, if have specific questions or any other trouble, don’t hesitate to contact us. In the vast majority of cases, a combination of patience and willingness to budge a penny or two should help you always get orders filled.

Of course, it should go without saying, but this all assumes you’re working with an options-friendly broker like thinkorswim, optionsXpress, or Interactive Brokers.

That’s right, next week is make or break time for our June trade. The theta (time decay) factor really kicks as expiration nears, so we don’t want to exit too early. But in this case, if we don’t get a significant down day next week, our SPY trade might exit flat or negative, so keep on the lookout for an exit signal from us.

In case you’re despairing already, the numbers below are worth noting. We use the 2-day RSI (Relative Strength Index) to measure technically overbought and oversold situations, and after this week’s gains all the major indexes are almost maxed out. The 2 day RSI numbers (0-100 scale) on the major indexes are as follows:

DJIA 93
OEX 89
SPX 95
RUT 96
MID 96
COMPQ 94
NDX 91

So next week should either see multiple churning distribution days (like we saw on Thursday), or a down day significant enough to give us a decent exit. The real question is, which will it be?