September Monthly Review

The most important thing to say about this month is that there’s a reason we have those trading rules! The Dow move of 300+ points on Tuesday caught just about everybody by surprise, and had we stayed in our positions instead of exiting on Monday, at least two of our positions would have switched from nice wins into infuriating losses.

Instead, the September expiration cycle was a much more stable one for us than August was. Recall that last month, we had to adjust each of our iron condor trades (which is something we never like to do), and were able to keep each trade profitable. This month was far simpler, and it’s worth mentioning that although our official profit target is just 10% per month – which should be plenty for any sane trader – since switching to ETF-based options in June our iron condors have averaged over 28% per trade! As you may know, all of our membership spots are full at the moment, but we do provide a waiting list if you’d like the chance to join us.

The Market

For most of September, the markets were relatively quiet and flat (although what counts as “quiet” is a lot different now than it was 6 months ago!). Obviously, expiration week saw the Fed announcement of a 50 bps rate cut, and a corresponding melt-up in the markets. The reason we were able to avoid the volatility-crushing craziness of this week was that we knew that anything can happen when Helicopter Ben gets behind the microphone and that it’s usually a good idea to sit out those sessions. Also, our trading rules dictate that we exit 4-10 calendar days prior to expiration, so we would’ve been out of our trades anyway.

The Fed action is concerning, as we wouldn’t have seen such a drastic move if the governors thought that the economy didn’t seriously need that shot in the arm. While fundamental economic theses don’t provide much in the way of trading opportunities (economic changes can take weeks, months, or more to have visible effects), an economy on the brink of recession isn’t good for anybody. We know you don’t read us to get policy or political opinion, but we can’t help but be concerned by a situation in which the economy looks this vulnerable and yet government policymakers continue to fund one of the most expensive (and most unsuccessful) wars in U.S. history.

Our Trades

Another month with no losers – with winners that far exceed our 10% goal! Still, there are some lessons to be learned here.

September QQQQ iron condor

Let’s start things off with the QQQQ trade. Result: We held this trade for 35 calendar days for a final net credit of $0.35 per position, which is a 24.4% return on capital risked. Clean and complete exit before expiration.

This is the second trade on the Cubes that we’ve done recently, and although it worked out much better this time, there were still occasions when we were sweating about the call side of the trade. The simple story is just that tech has continued to show strength recently, and when you combine a general market that is flat-to-up with a sector that is definitely positive, it makes sense that short calls will be threatened. What’s interesting about both this trade and the QQQQ position we entered back in July is that in both cases the market seemed to price in smaller amounts of volatility for the ETF, which meant that when the index showed strength as expected, we were hurt more on the call side than we would have been if there was more of a volatility premium buffer. The conclusion we draw from this is that it’s fine to keep opening positions in QQQQ, so long as we use the position to add some bullish-trending diversification to other positions based on indexes with downward biases, like IWM.

September SPY iron condor

Result: We held this trade for 43 days for a final net credit of $0.49 per position, which is a 44.5% return on capital risked. Clean and complete exit before expiration.

The Spyders continue to be our most reliable performer, and in this new volatility environment it makes even more sense to keep opening positions here. At $148.10, we still had three strikes of safety left, but we didn’t want to be exposed to any Fed surprises, plus our trading rules dictate that we exit no later than 4 calendar days prior to expiration.

September IWM iron condor

Result: We held this trade for 21 days for a final net credit of $0.32 per position, which is a 21.9% return on capital risked. Again, clean and complete exit before expiration.

The Russell 2000 continues to be a nice place to look for iron condor spreads: the premium is nice, and the $1 strike prices allow us to slice and dice moves in the underlying that would be more difficult to capture in some other ETFs.

Conclusion

We may look to the Diamonds (DIA) next month in addition to our usual candidates, and if we do see some sustained market strength over the next week, we may also be ready to take full advantage of the 3-5 trades our strategy allows us to enter every month: we’ve been trading three positions throughout the summer, mostly because this has been such an unsteady market environment. While we’re just as [tag]market neutral[/tag] now as we have ever been, we’d like to see some real stability (note: as opposed to irrational exuberance) so that we can find a base from which to analyze the major indexes. As always, thanks for reading, and let us know what’s on your mind.

[tags] iron condor, options, trading, SPY, IWM, QQQQ, VIX, market, volatility, expiration [/tags]


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Jared Woodard specializes in trading volatility as an asset class. With over a decade of experience trading options and other volatility products ... Read More

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