How I’m Adjusting My Trades During This Market Sell-Off

How I’m Adjusting My Trades During This Market Sell-Off

Posted On October 28, 2020 3:40 pm

Yesterday, I discussed how, when, and why I make adjustments to existing positions and now we have a live example of this process in action. Last week, I laid out the iron condor position I’d established in PayPal (PYPL), which was an iron condor that used the 190/195-215/220 strikes as my structure for this Friday, 11/30, as the expiration date.  The initial position collected $1.50 of premium — ours to keep if shares stayed with the 195-215 level. I thought this was a good way to gather short-term premium collection prior to the PYPL earnings report on Nov 2. Ahh, but the best-laid plans can be washed away by macro events.  

Over the past week, the major indices such as SPDR 500 (SPY) and Nasdaq 100 (QQQ), have declined some 7%, as they’re rapidly approaching 10% “correction” territory. PYPL has dropped a less severe 4% since we established the position. However, it’s still threatening the 195 strike put. This is how the original positions risk/reward graph presently looks:

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paypal snapshot analysis

Sensing market weakness on Tuesday, I rolled the 215/220 call spread down to the 210/25 strikes for a $0.50 credit. As the market continued to sell off, I took another roll, bringing the call spread down to the 20/210 strikes for an additional $0.50 credit. I’ve now collected $3.00 for the iron condor, and the risk/reward profile looks like this. 

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paypal snapshot analysis 2020

Despite PYPL shares — currently at $193 and breaching the 195 put — the position is still showing a modest profit. This is due to active and aggressive risk management where I rolled the iron condor call side to collect the additional premium. The result is twofold — reducing my overall risk and, believe it or not, increasing my profit potential. Now, if PYPL bounces back above $195 by Friday, I can profit by $250 per contract, rather than the original $150;  a 66% increase in my profit potential while the risk drops from $3.50 to just $1.50. I like those odds. 

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Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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