Post Trade Analysis for Week Ending February 24, 2012

Hey All!

Now for the analysis on the trade entered into Wednesday.  As you know, the trade came out profitable with our targeted 6.6% ROI.  So here is our postgame analysis.  I have copied the Wednesday posting and added some additional info in a different color.  So here goes:

TRADE FOR WEEK ENDING FEBRUARY 24, 2012:

This trade is a condor.  I know, I know – I really don’t do these often and am straying from my usual pattern.  Straying just a little, but really not much, think of what a condor trade is, two spread trades put together.  Here are the details:

RUT

RUT     785     Put     ($0.34)

RUT     795     Put      $0.52

RUT     835     Call      $0.72

RUT     845     Call     ($0.24)             This trade did give an overall Net Credit of $0.66 or 6.60% ROI

ANALYSIS

1.       The 835 price level for the call side is just above the 6 month high price for the index. This is where our greatest risk was as the rest of the market was testing new highs all week.  The RUT index essentially ended up flat for the week, starting Tuesday at 830 and ending Friday at 829.  Also the ROI component of 4.8% shows the market thought this the more risky trade.

2.       The 795 price level for the put side is right at the 2^nd tier support level (actual number is 793, but 795 strike price is the closest to the actual number).  This was the easiest part of the trade.  This had a smaller ROI component @ 1.8%.  Usually anything 2.0% or below is considered pretty much a sure thing in the options market.

3.       My probability calculator put the odds at 88.62% of RUT ending up between the upper put and lower call.  Most experts out there say the minimum threshold for considering a trade in your probability calculator is 85%.  This beat that threshold. 

4.       The trend for the week so far has been downward for the RUT index.  We went just over 2 Std. Dev. below the strike price at time of trade for the put side to help in protection and went just over 1 Std. Dev. on the call side.  

5.       The trend is slightly down, but not in a sharp downturn.  We are losing a bit each day, and that is ok with our protection built in.  We have used the Std. Dev. on both sides as protection.  Also with the RUT settling Friday AM this takes some of the time risk out of the picture that would remain if we went to NDX or SPX.

6.       I did look at the other index option – SPX and NDX.  SPX had comparable ROI spreads, but the Friday AM settlement for the RUT pushed the RUT in front.  The NDX just didn’t have the ROI needed.  Wednesday morning the NDX was hitting 2.0 – 3.3 ROI on comparable spreads, so I nixed the NDX.    

7.       Summation:

a.       The boundary strikes for the condor were at or above support and resistance levels for the RUT index.  This is a key step in setting up where your “wings” of the condor are.  Pick support and resistance levels you are comfortable with and that give a good measure of safety.

b.      The probability calculator gave a favorable percent of this trade ending up in my favor

c.       I was able to get good ROIs at 1.0 – 2.0 Std Dev away from the strike price

d.      The trend line was basically flat through the week.  The condor strategy works best in non-directional markets – markets where the priceline is basically flat. 

e.      All the above showed that we put the odd in our favor.  That is what we try to do each week.  This week we saw a special situation where the RUT index was essentially flattening out.  When it flattens out then we can use our contrarian spread strategy on both sides of the price line and enter into a condor trade. 

f.        The condor will return more than the usual credit spreads we do since we are hitting both sides of the price line.  But as with anything in the options market, the more premium you get the more risk you assume. 

DISCLAIMER:  Hashley Capital Management, LLC; as well as myself are not giving any trading advice.  All data is historical in nature and is intended for use as an educational tool.  Trading in options is risky and can result in loss of capital.  There is no attempt to sell any brokerage services or act as a broker or dealer by Hashley Capital Management, LLC.  Any forward looking comments on this blog are not attempts to solicit business for Hashley Capital Management, LLC.  If you choose to follow the same path and invest in the strategies and trades used by Hashley Capital Management, LLC after doing your own due diligence than that is your decision and yours alone. 

Reach me @:

Email:  hashleycm@yahoo.com

Twitter: @hashleycm

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TTFN

Ash