29 lines
1.9 KiB
Plaintext
29 lines
1.9 KiB
Plaintext
technical analysis, fundamental analysis, volatility analysis, feel, and
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subjectivity.
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A Safe Landing for an Iron Condor
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Although traders can’t control what the market does, they can control how
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they react to the market. Assume a trader has done due diligence in studying
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a stock and feels it is a qualified candidate for a neutral strategy. With the
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stock at $90, a 16.5 percent implied volatility, and 41 days until expiration,
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the standard deviation is about 5. The trader sells the following iron condor:
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With the stock at $90, directly between the two short strikes, the trade is
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direction neutral. The maximum profit is equal to the total premium taken
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in, which in this case is $800. The maximum loss is $4,200. There is about
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a two-thirds chance of retaining the $800 at expiration.
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After one week, the overall market begins trending higher on unexpected
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bullish economic news. This stock follows suit and is now trading at $93,
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and concern is mounting that the rally will continue. The value of the spread
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now is about 1.10 per contract (we ignore slippage from trading on the bid-
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ask spreads of the four legs of the spread). This means the trade has lost
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$300 because it would cost $1,100 to buy back what the trader sold for a
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total of $800.
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One strategy for managing this trade looking forward is inaction. The
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philosophy is that sometimes these trades just don’t work out and you take
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your lumps. The philosophy is that the winners should outweigh the losers
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over the long term. For some of the more talented and successful traders
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with a proven track record, this may be a viable strategy, but there are more
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active options as well. A trader can either close the spread or adjust it.
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The two sets of data that must be considered in this decision are the prices
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of the individual options and the greeks for the trade. Exhibit 10.8 shows
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the new data with the stock at $93.
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EXHIBIT 10.8 Greeks for iron condor with stock at $93. |