Thursday, January 28, 2010

Strategy Repair (Iron Condor)

So Yesterday I decided to sell 10 Feb '10 55/57.5/47.5/45 Iron Condor on NFLX going into earnings. The move was double the move that was priced into earnings jumping over 20%. This put me at pretty substantial loss. This was one of those trades that went out of the 1 standard deviation range. But I have learned not to panic on moves like these and am trying to scalp some of my losses away.

So let me give you a few more details. I sold each Iron condor for $1.25 for a total premium collected of $1,250 and a maximum loss of -$1,250. A 1:1. The large move to the upside made the put spread I sold worth only $0.05 so I bought back all ten of those this morning for a total of $50. I locked in the gain of about $610. Then I went out and bought 3 Mar '10 $65 calls to give me some positive delta as I am now convinced that there is more room to the upside. I am holding the Call spread for now to see if we can get some kind of mean reversion before it continues higher, trying to limit my loss. Depending on the pull back I am willing to buy another 3 call contracts.

Now there is no guarantee that this will work, but I think that it is worth a shot. I may even end up losing more money then if I would have just taken my loss on the call spread.

I will keep you posted on how this turns out.

1 comment:

  1. So this is a good example of why a condor over a strangle is safer for this type of play. You said that you could end up losing even more with the purchase of the calls, but if those long calls you have go to zero, doesn't that mean your naked call spread could come back in the money? I guess you are in no mans land if the stock finishes between $57.50-$65.

    So with respect to the 1:1 ratio, what was the risk/reward had you widened the range of the condor? What price was the underlying at when you put this play on? I'm a firm believer in having to take some losses in order to properly attain a learning experience. I believe I get a false sense of security on winning plays and tend to think I must have done something right. For example, the AAPL strangle sell. I could have wound up on the opposite side and had a 3 standard deviation move and took some pretty big losses. That's why I wanted to acknowledge that it was probably just luck that things went the way we thought and doesn't necessarily mean that I somehow did something right. I'll continue to play with small sizes until I can come to some rational evidence of what I'm doing before I start playing with bigger positions.

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