2006 SPX Credit Spread and Iron Condor Stock Option Trading Update

A vicious second quarter has come to a close, let's see how our credit spread strategy has fared.

The S&P 500 opened this quarter on April 3rd at 1,302.88 and closed out the quarter at 1,270.20, a 2.5% decline in this broad market index over the last three months. The new highs of last quarter gave way to new lows for the year.  While the index recovered much of the ground and now hovers near break-even, the buy-and-hold crowd is now wondering whether the large cap index can make it's way back above 1,300 before the year is out.

Trades for April and May were opened and closed without incident, continuing the success of the first three months.  In early May, a June spread was opened that allowed for more than a 2 standard deviation move, up or down, in the index.  Aggressive selling saw the index fall greater than two standard deviations, forcing an adjustment early in the trade.  After initially finding support, the index continued to sell-off triggering our stop and the trade was closed with a loss.

S&P 500 Second Quarter Statistics S&P 500 2nd Qtr Return -2.5% S&P 500 2nd Qtr Range 1,219.29 - 1,326.70 SPX Iron Condor Return 3.6%     S&P 500 YTD Return 1.8% S&P 500 YTD Range 1,245 - 1,302.88 SPX Iron Condor YTD Return 36.5%

Second Quarter Stock Option Trading Journal      April '06 SPX Option Position      STO SPX April 1,345 Call      BTO SPX April 1,360 Call      BTO SPX April 1,230 Put      STO SPX April 1,245 Put      Opened for Credit of $1.75 (Max Return 11.7%)      This 15 point April condor was closed for a $0.30,      leaving us with a $1.45 profit or 9.6% return on risk.      May '06 SPX Option Position      STO SPX May 1,360 Call      BTO SPX May 1,370 Call      BTO SPX May 1,230 Put      STO SPX May 1,240 Put      Opened for Credit of $1.65 (Max Return 16.5%)      This 10 point May option spread was closed for a      .30 debit, leaving us with $1.35 profit or 13.5%      return on risk.      June '06 SPX Option Position      STO SPX June 1,370 Call      BTO SPX June 1,380 Call      BTO SPX June 1,250 Put      STO SPX June 1,240 Put      Opened for Credit of $1.55 (Max Return 15.5%)      This trade performed in line with our expectations      until May 17, 2006, when the market began selling       off precipitously.  On May 18th, the call spreads      were closed for a .10 debit, reducing the credit      to $1.45, and a new spread was opened.      STO SPX June 1,325 Call      BTO SPX June 1,335 Call      Opened for Credit of .90, increasing total credit      to $2.35.  (Max Return 23.5%)      Additional downside the next day triggered an      adjustment of the put option spread, with the      initial spread closed for a debit of $2.90.  A      new bull put spread was opened at an area of      technical support to offset the cost of closing      the 1,230-1,240 position.      STO SPX June 1,220 Put      BTO SPX June 1,210 Put      This new bull put spread was opened for a credit      of $1.20, leaving us with a total credit of $0.65      or a maximum potential return of 6.5%.  This      adjustment was completed on May 19, 2006.      The market saw a reversal day on May 24th, and it      appeared that we might see this trade through      with a 3% or better return.  After hitting      resistance at 1,290, the bears again took control.      The selling did not relent through the first half      of June taking the index to a low of about 1,219.      Of course, our position was adjusted before the      SPX hit our short strike.      BTC SPX June 1,220 Put      STC SPX June 1,210 Put      Closed for Debit of $2.50.      The corresponding 1,324 - 1,335 Call option      spread was closed for a debit of .10.  New June      spreads were not opened because there was very      little time left until June expiration and the      market remained very turbulent.  As such, it was      difficult to find a reasonably safe spread that      could be opened for a sufficiently large enough      return to justify the risk.      The month of June was concluded with a loss of $1.95      or 19.5% of capital traded. SECOND QUARTER SUMMARY      The same amount of capital was traded each month,      making it comparison of returns straight forward.                April      9.6%                May       13.5%                June     -19.5%                Quarterly  3.6%

While the second quarter was more exciting than we like, and the returns were disappointing in comparison to what we typically see, our performance is much preferable to what was experienced by a buy-and-hold investor.  In fact, with year-to-date profits of 36.5% on the books there is really not too much for us to complain about.

There were some trading lessons being taught be the market this quarter.  Once again, the market reached out and reminded us how vitally important it is to have a trading plan.  With the S&P 500 making a move of 2+ standard deviations, it would have been very easy to hesitate and find our short options in-the-money.  While I always like to see a profit, after reviewing the trading activity of the last three months I have to chalk each month up as a successful implementation of my trading plan.

Surviving this latest sell off and having booked an overall profit year-to-date, 2006 remains a positive year for our strategy. 

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