Performance comparison

Here’s how the major market indexes, the S&P 500 Covered Call Fund (BEP), and the Condor Options trades performed over the past month:

• S&P 500: 2.52%
• Dow Jones Industrials: 1.07%
• Russell 2000: 2.78%
• S&P Covered Call Fund: 7.69%
• Condor Options: 12.62%
• Note: the period measured is from expiration to expiration, rather than from the start of the month.

May Iron Condors

• DIA 116/118/134/136: 30.46% return - This was a no-brainer; we closed out the 188 puts on principle (markets tend to crash down, not up) and let the rest expire worthless.
• DIA 113/115/130/132: (10.56%) return - We closed out this position fairly quickly as the rally gathered steam in order to reduce our overall risk. As part of a larger portfolio, it would have been easier to hold on and make an exit several days later for a small win/breakeven - some readers did just that.
• SPY 128/130/146/148: 17.96% return

May Reading

Here are some posts from the past month that are worth checking out if you didn’t catch them the first time around:

• Getting Your Fill
• Calendar Options: Five Things You Need to Know About Calendar Spreads
• Introducing Calendar Options
• How Vega Can Deceive You: Part I
• How Vega Can Deceive You: Part II
• 8 Hedging Ideas for Iron Condors, Part 1
• 8 Hedging Ideas for Iron Condors, Part 2 (Members only)

We’re already in two June positions and, if implied volatility picks up next week, may well enter two more.  Hopefully this summer will be a bit more lively than usual!

The Thesis

With 36 days until June expiration, this is a good time to open a calendar position. At this point in the cycle, we’re considering single (one strike) calendar spreads; however, single calendars are best opened at the money, and RTH is trading just about dead center between the 95 strike and the 100 strike. With economic conditions still questionable, we don’t want to be bullish and use the 100 strike, but the strength that the market has been showing is reason enough not to be too bearish and pick the 95 strike either. Therefore, we’re going to make this another double calendar.

The Trade

Were opening the following double-calendar spread on RTH:

+2 RTH July 100 call
-2 RTH June 100 call
+2 RTH July 95 put
-2 RTH June 95 put
for a net debit of $2.35.

Our break-even points are at $93.40 and $101.90. Target profit is $0.35, and our stop-loss is $0.40—but we expect to be able to adjust the trade long before getting there. As with our EEM double-calendar, we’re trading an even number of contracts to create a position that can be split if adjustment is needed.

One way to turn the trade around would be to sell the entire put-spread position and buy an equal number of contracts in a call spread at 160. This would turn our 140/150 double-calendar into a 150/160 double-calendar, moving our break-even points up by about $10—but then we’d be taking on much greater downside risk.

But there’s another option that raises our upper break-even point and still leaves a safety net on the downside. If we sell half of the put spread at 140 and buy a half position in a call calendar spread at 160, we can turn this double-calendar into a center-weighted triple. With this adjustment, we’d recoup the current loss as long as EEM is between about $143 and $160 at expiration—and, we could end up with at least a 10% profit, if the shares are trading between $146 and $155 at expiration (barring a significant further drop in implied volatility). Finally, we’ll probably have a chance to adjust again if the rally continues (or reverses too far).

The Trade

In light of the continuing strength in world markets, balanced with the risk of overbought conditions, we’re making the following adjustment to our June EEM double-calendar spread:

-1 EEM Sept 140 put
+1 EEM June 140 put
for a net credit of $3.90.

+1 EEM Sept 160 call
-1 EEM June 160 call
for a net debit of $4.45.

Our new breakeven points are $143.70 and $159.50. Note that in this adjustment, one contract represents half of our initial position. For example, if we had started with a 4-contract position, we’d be taking 2 contracts off the put spread and adding 2 call spreads at 160.

Volume was a bit higher - back toward average levels at least, though most of that came from the first 30 and last 60 minutes of trading. Volatility continued its march to nowhere.

Fortunately, Wall Street people are funny, whether intentionally or not, so at least we had something to laugh at today. At right, the big names at Blackstone (surely unintentionally) mimic that famous Reservoir Dogs vibe [h/t WSJ]. The Epicurean Dealmaker has a pretty hilarous sendup of Blackstone’s rather indulgent annual report. He’s completely right about the absurd bagginess of Steve Schwarzman’s pants.

Next: Adam explores possible new celebrity talent that the geniuses at Real Money might want to tap. Kid Rock strikes us as somebody who would probably be a big fan of these FRO options everybody’s talking about.

Not funny, but plenty engrossing: last week, This American Life discussed the subprime crisis, humanized both the retail victims and the institutional victimizers, and managed to explain CDOs in a non-patronizing way. Of course, TAL is always fantastic anyway, and we hope Ira Glass’s voice feels better soon.

Finally, speaking of another ill-fitting suit, check out the bluegrass Darth Vader after the reversal readings.

Reversal Readings

Lots of overbought readings today, and with so many 200DMAs overhead, odds are good here for a turn lower.

SPY - 95
EEM - Emerging markets - 94.35
FXI - China - 91.24
XLB - Materials - 95.17
IYR - Real Estate - 96.52
RTH - Retail - 91.40
XLI - Industrial - 94.50
GLD - Gold - 3.21
XLY - Consumer Discretionary - 98.01
DBA - Agriculture - 6.17
PHO - Water - 99.17
PBW - Alt Energy - 98.96
EWW - Mexico - 98.23

So you laid down some condors a few weeks ago and now you are ready to get out. You put in a limit order to buy back your Condor at the Mid-Price. You wait. Nothing. The market oscillates around and now your limit order that was once at the Mid-Price is sitting right at the Market Price. Still no fill.Your bid is now actually above the Market Asking Price and still no fill. You want out but your just not getting filled. So what gives? How can you get out?

This happens frequently when one leg of your Condor is under more pressure than the other. This typically results in one of your long options having an extremely low price and it may not even have a bid at all. This is the root of your problem. The market makers don’t want to buy your junky, worthless option and no one else in the market does either. In which case a way to get filled easier is to not sell that option. Close the Iron condor as a three legged trade, buying back your two short options and the long option that still has a bid. If your broker won’t execute this kind of custom trade then you can simply buy back one leg as a vertical spread and then buy back your other short option as a single. Similar situations may exist when the market is in the dead center of your condor near expiration. There may not have enough order flow in the long options to get your condor filled. In such a case you simply buy back both your short options and write off the residual value of your long options. If the market makes a big enough move in one direction you may even be able to sell one of your long options to get a bit more credit out of the trade.