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Tales of a Technician: How I Lost with SPX Condors

February 17, 2020

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Usually, when I do a trade retrospective I select a glorious winning trade. That way, I can beat my chest, King Kong style. Upon completing the article, I depart my computer station convinced of my intelligence and full of optimism for the future.

This will not be one of those times.

Instead, I reached deep into my bag of losers to select an iron condor that didn’t fly right. Despite begging and cajoling, the dastardly bird kept squawking and pecking until I finally put it out of its misery. Feel not for the bird, though – but me. It had its chance. Multiple chances, in fact. I’m the one that has to live with the scars. Devil bird is likely living it up on the other side, mocking me for my mishaps.

Let’s look back at my trade to see what can be learned.

In the Beginning

On December 31st, reasoning that the S&P 500 had risen far enough to warrant some digestion, and desirous of adding to my portfolio theta, I entered a February 3010/3020/3380/3390 Iron Condor for $1.80 credit. At the time, SPX was sitting at $3230, giving me a profit range of $210 to the downside and $150 to the upside.

Followers of the Cash Flow Condors system will note this was a more aggressive variation of what you’re used to. I was 51 days to expiration and went closer to the money to get $1.80 versus the usual $1.00. As a result, my probability of profit was smaller, but my potential payday was bigger.

Here’s a picture of my original trade:

High Hopes

The position started well. As expected, SPX chopped sideways for about a week. Then, unholy demand arrived jamming the market to the moon.

Adjustment Time

Sometimes I leave my condors alone, and other times I tinker. This was a case of the latter. On January 17th, I was closing in on my profit target for the bull put side (it ended up hitting it on Jan 20th) and decided to add a second bull put – the Feb 3190/3180 put spread for 90 cents.

The advantage was I received another 90 cents, thus reducing my overall risk. The disadvantage was I had to shrink the profit range by pulling the put side closer. Like so:

Get Your Hedge On

The next few weeks were pretty wild, but ultimately SPX ripped to 3380 and knocked me out of the bear call for $5.25. I exited the first bull put for 25 cents, and the extra bull put for 20 cents debit. Here’s an easy way to calculate the final P/L. Add up the credits received at the various entries, then subtract the debits paid to exit.

Initial Condor: $2.20 credit

Extra Bull Put: 90 cents credit

Exit Condor: 25 cents + $5.25 = $5.50 debit

Exit extra Bull Put: 20 cents debit

Tally: $3.10 credit – $5.70 = $2.60 loss

Final Takeaways

Ya Got Me!

The relentless rise of large-caps has made this a treacherous environment for SPX condors. Here are my key takeaways

One: Losing $2.65 on a condor that had the potential to earn $2.20 isn’t too bad. Particularly given its higher probability of profit. Losing 2x to 3x my potential gain would have been unforgivable.

Two: The extra bull put helped. Here’s a situation where being proactive ended up minimizing losses. It ended up being important that I stayed far OTM And only went for 90 cents, though. That sharp drop in late-January would have hit those that went too tight.

Three: The saving grace is that this SPX condor was a single trade in an otherwise bullish leaning portfolio. Its pain was more than offset by gains in long delta trades elsewhere.

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One Reply to “Tales of a Technician: How I Lost with SPX Condors”

  1. Avatar ROBERTMCKEE says:

    Thanks for sharing! One key lesson on condors – make sure you have some direction trades going to offset the risk.

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