With the continuation yesterday of Friday’s market weakness, the last of our April 3 calendar-spread bonus trades hit its minimum profit target. Here’s a summary of the three positions:
EEM May/June 140 - Reached 20% profit on April 15, less than two weeks into the trade.- XLE May/June 77 - Even if entered at the less-than-optimal price of $1.20, this position achieved our 20% minimum profit target on the sell-off in energy that occurred May 1, which was within 4 weeks of entering.
- IYR May/June 69 - The iShares real-estate ETF proved stronger than we expected, but a week ago the spread was trading near a 20% gain. It would’ve been hard to get an order filled at the target price of $1.50 last week, but today the mid price rose as high as $1.575, and we booked a 20% profit on half our position. We kept the other half open in anticipation of technical resistance keeping a lid on IYR and possibly doubling our profit on the remaining contracts by May expiration.
So all three trades hit our minimum profit target of 20% return on capital risked, with an average duration just a little over 3 weeks. And this despite the unexpected strength in IYR and a sharp rally in energy. But that’s not the whole story…
Win Some, Lose Some - How to Come Out on Top
Unless you’re new to Condor Options, you know we don’t pretend that our losing trades never existed, like some (maybe most) trading sites and newsletters do. Our directional bonus trade on Garmin, posted April 21, was stopped out on April 30, when the company released earnings that fell short of analysts’ expectations. The percentage loss was in the 80% to 90% range - but with proper risk management, the dollar loss would’ve been insignificant in terms of your overall portfolio.
What does “proper risk management” mean? In this case, three things:
- Allocate only a small portion of your options portfolio to speculative, directional trades. How small? It’s a good idea to limit the combined risk of all your speculative plays to no more than 20 or 30 percent of the total amount you devote to options; use the remaining 70 to 80 percent for non-directional income-generating strategies like iron condors and calendar spreads.
- Keep your dollar risk on any single directional play even smaller. For example, if you have a $10,000 options portfolio, you wouldn’t want to risk 25% of it ($2,500) on any one directional trade - or even a few different ones. This is why our top examples of how to play the anticipated GRMN move used low-cost, out-of-the-money call spreads rather than single calls at or in the money. With these examples, you could have traded a two-contract (per leg) spread with a maximum risk of just a few hundred dollars.
- Pare your risk ahead of events. We warned that even though Garmin had a good track record of beating earnings estimates, there was still a significant chance they could miss this time. Unless you like to gamble (we generally don’t), it’s usually a good idea to trim down your exposure to events that could make or break a trade. If you had taken half of your position off the table April 29th, at approximately break-even, your loss on the 30th would’ve been closer to 40%.
Now, Rules 2 and 3 are pretty straightforward - but regarding Rule 1, you might ask, Am I really supposed to devote three quarters of my options portfolio to iron condors? Well, we do typically show subscribers at least three different, complementary iron condor trades each month - but a lot of you have been asking for more.
Our answer?
Calendar Options
Within the next day or two, we’ll be telling you about a new theme we’re developing in order to show you, on a regular basis, how to add calendar spreads to your stable of delta-neutral income-generating option strategies. Calendar Options will expand our opportunities in a whole new dimension - time - and that gives us not just greater diversification, but also additional flexibility. More to come…