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Post by ThetaJunkie on Jun 23, 2013 22:56:15 GMT
Hello all, With the recent pop in volatility, we have so many more options for our options  I'd like to go over a high probability trade that takes advantage of the higher volatility - the Broken Wing Iron Condor (BWIC). The standard Iron Condor is usually a delta neutral trade. The standard iron condor is made up of a credit put spread and an equally wide credit call spread. The objective is to have the stock price between the two short strikes by end of expiration. The BWIC is a type of iron condor that has a strong directional bias. You get this bias by make the widths of either the put or the call side greater than the other, while you collect more credit than theof the smaller width. Here is an example I put on on June 18th in IWM. The volatility in IWM was 20% which was higher than its been for a long time. The IWM stock price was 98.88. I believed IWM would be going lower so I wanted the put strikes to be narrower than the call strikes to give me no risk to the downside. I sold the Jul 97/98 put spread and the 101/104 call spread for $1.08. This credit was more than the $1 put spread width so I had no downside risk. The $3 dollar wide call spread gave me $3 of risk to upside, less the $1.08 I collected for a net $1.92 upside risk. If IWM is between 98 and 101 at Jul expiration I would keep the full 1.08.  The break-even on the upside is 101 (short call strike) +1.08 (credit received) or 102.08. This trade gives me roughly at 71% probability of profit (POP). I require my BWIC to have at least 70% POP. Now what do I want to happen? I want: - Volatility to contract - if IV contracts, the 101 short call will shrink in value faster than the 104 long call for a net + in value. The put spread will contract a bit, but being only one strike wide, the short and long will contract in price a lesser amount; or
- The stock price of IWM to fall - if the stock price falls, the value of 101 short call will shrink faster than the 104 long call for a net + in value. The put spread will increase in price but at a less amount than the short call; or
- IWM to do nothing - both the spreads will shrink in value as the theta burns
Lets see what has happened since the 18th: As we know, IWM (along with the rest of the market) has dropped. On Friday it closed at 95.85, down $3 or 3% from when I put on the trade.  The stock price is far down the current profit line (white line), almost to the max for the day! The spread has come in $32.53 or 30% in just 3 days.  The column with 1.08 is the trade price of each option when the trade was put on. The 101 call collected .97 while the 104 call cost .24 for a spread credit of .73. The 97/98 put spread gave me a credit of .35. The next column over is the price as of Friday the 21st. The 101 call has shrunk to .225, the 104 to .04; the spread has collapsed to .185 (from .73). Meanwhile the put spread has increased to .57 which is still less than the call credit spread has collapsed. So we're up. Its interesting to note that IWM's IV has increased to 23% from 20% but we still are up money. What is the plan? Well the plan is to close the spread on Monday. While I haven't gotten my 50% target, 30% in a few days is awesome and can't be squandered. |
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Post by ThetaJunkie on Jun 25, 2013 23:04:23 GMT
Adjusting Broken Wing Iron CondorsThere are a number of ways you can adjust broken wing iron condors - it depends on what side is being tested.
On June 13th, I put on a TBT broken wing iron condor: sold the 60/65 put spread and sold the 70/71 all spread. I collected 1.30 so no upside risk. The 5 dollar wide put spread, less the 1.30 credit gave me 3.70 in risk to the downside. My break even was 63.70 and I had probability of success in the low 70s.
TBT could drop a bit, stay here or go higher and I would be profitable. If TBT ran up quickly, I would have the opportunity to adjust the put spread where all my risk was located.
By June 20th, the bonds had plummeted and TBT was up big. While scanning my positions, I noticed that the 60/65 put spread value had practically disappeared. Because of this, I wanted to make an adjustment that would eliminate all of my risk if at all possible.
Remember a broken wing iron condor, like a broken wing butterfly, has an embedded wider short strike. That is this TBT position was a one dollar wide 64/65/70/71 iron condor with a four dollar wide 60/64 put spread added. If we close the four dollar wide put spread to leave the iron condor we will have cut out $4 in risk. If the adjustment is leaves a credit > $1 then we will have a free iron condor.
I was able to buy the 60/64 put spread for .15. This gave me an 64/65/70/71 iron butterfly for 1.15. Since the maximum you can lose on a $1 wide iron condor is $1 less the credit received, TBT can go anywhere from 0 to infinity and I'll keep at least .15; its a no risk trade after adjustment.
Today (June 27th) this iron condor could be bought back for .80 for a .30 profit. However with no risk we can wait for more. I called Tom and Tony to ask them what they would do in this situation. Tom replied that he wouldn't even look at closing the iron condor until you can keep at least 50% of the credit.
Why would you ever consider closing this trade early since you have no risk? In a nutshell, you really do have some risk - you still have $1 of credit at risk. Assume this iron condor was trading at .40; if you don't close it, you can gain another .40 but you will give up .60 if TBT ends up outside either of your credit spreads.
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Post by ThetaJunkie on Jun 30, 2013 22:58:56 GMT
Adjusting if wide strike tested
Adjustments when your wide strike side (or your risk side) is tested is very similar to what you would do in a Jade Lizard.
I can't show any nifty screen captures because I don't have any broken wing iron condors being tested to the risk side.
So when should you look to make an adjustment? My rule of thumb is when the break even is crossed - note I said break even and not the short strike. Your wide strike spread gives you a bit of room away from your short strike before the break even point. At the break even point I look to roll my narrow spread side down if there is enough credit. I'd like to get .20 but that could be difficult. If its < .15 I usually won't roll.
How far down (or up) should you roll? My thinking is if the break even is crossed, I can be aggressive. So I'll look at matching the wide spread's short strike to see what that gives me in credits. Remember, as long as you roll for a credit, you will continue to have no risk to the narrow spread side. I don't go inverted although you may be able to - I'd have to run some numbers to see what happens in that case.
That's all I have right now.
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