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How I’m Managing My SPY Trade

How I’m Managing My SPY Trade

Posted On December 1, 2020 3:28 pm
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Roughly a month ago, in the days prior to the election, I revealed how I  established an iron condor position in the SPDR 500 Trust (SPY). My dual thesis was that post-election implied volatility would decline significantly, and the SPY or stock market would settle into a fairly well-defined range. 

I was 100% correct on the first point as implied volatility in the SPY declined from 38% pre-election to its current 20% level.  

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However, on the second component of SPY staying range-bound, I was severely wrong, forcing me to make several adjustments over the past few weeks. I thought it might be instructional to share the specifics of adjustments, my reasoning behind them, and where the position now stands. 

On 10/27, with the SPY trading around $338, I initiated an iron condor using the 285/295 puts and the 365/375 Calls for a $2.80 Net Credit. 

spy snapshot analysis

The inside strikes of 295 and 365 were each about 10% out-of-the-money with a 0.11 delta, meaning they had a nearly 90% chance of expiring worthless.  Coupled with the expected decline in implied volatility and the inexorable march of time decay (theta), I figured I’d achieve 50% of the maximum profit within two to three weeks. 

But, a funny thing happened as I was counting my chickens; the SPY historically rallied, running almost 11% in just 5 trading days pushing through the short 365 strike.  Uh oh! 

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spy stock chart 2020

After white-knuckling this breach of my inside call for a day, I took action on 11/9 when the SPY pulled back towards the 360 level.  The adjustment I made was to roll up the position’s put side, dramatically, to collect a good chunk of premium.  Specifically, I rolled the existing 285/290 spread up to the 330/340 strikes for a $1.10 credit.

spy snapshot 2020

The resulting position was an iron condor in the 330/340P-365/375C for a $3.95 Net Credit.  Meaning we collected $3.95 which represented our maximum profit, but the risk was still $6.05.  This is calculated by the width between strikes minus the premium collected ($10.00 – $3.95 + $6.05).  The position got some relief in mid-November as SPY pulled back and volatility continued to subside. 

But, last week a new rally commenced leading me to make a more drastic decision adjustment, one focused on risk reduction.  As I wrote to Options360 members in Monday’s Alert, “ We are taking two steps here to reduce risk.  It’s a two-step process, first,  close half (1 contract) of the iron condor for $3.90 or around breakeven.  Second, roll the remaining position up and cut the width between strikes to 5 from 10 wide.” 

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After the adjustments, the new position’s an iron condor of a long 1 contract 347 put, short 1 contract 352, short 1 contract 365 call, and long 1 contract 370 call — a net credit of $2.95 with $5 width between strikes.  

Although this multi-part adjustment required a $1 payment, bringing our net credit from $3.95 to $2.95, the crucial element was narrowing the width between strikes from $10 wide to $5 wide.  This brought our risk down from nearly $1,200 to just $200; an 83% risk reduction.  The new position still has a profit potential of $300 on just $200 of risk or the possibility of a 110% return on risk. 

However, we’re not out of the woods yet.  With SPY rallying through $366 today, I need to start contemplating my next move. But, with the risk mostly removed, my knuckles will no longer be turning white. 

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About author

Steve Smith
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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