Shares declined by 1.5% over the 24-day lifespan of the call option leg, or a -23% annual rate. The options position produced a +133.3% yield on debit, for a +2,209% annual rate.
The final result for the entire position, calls and puts, is as follows:
Shares on average declined by 1.8% over 23-1/2 days, or a -27% annual rate. The options produced a 16.3% yield on debit, for a +253.% annual rate.
Update 7/1/2015: The put option leg of my FXE strangle moved to the edge of its profit zone, and I exited for a loss. FXE has been in a downtrend since June 18, which is 10 days after I entered the position.
Shares declined by 1.9% over the 23-day lifespan of the put leg, or a -31% annual rate. The puts produced a 16.9% loss on debit, for a -268% annual rate.
The adjustment turns the strangle into a short call with a $115 strike price, which increases in value as the price of the underlying symbol declines. It is profitable at expiration all the way up to $115.98, which is the strike plus the premium I received from selling the call.
Update 6/18/2015: The FXE iron condor moved to the edge of profitability, and I exited the positon for a profit.
Shares rose by 1.6% over nine days, or a +674% annual rate. The options poiton produced a 52.6% yield on debit, for a +2,135% annual rate.
Update 6/9/2015: I opened an additional position in FXE in order to put funds to use in a tax-deferred account that is too small to handle the unhedged strangle spread I used for my first position. The new position as a closer expiration date than the first entry, allowing room for multiple shorter-term plays.
Iron condor, short the $112 calls and long the $113 calls,
sold for a credit and expiring June 20
Probability of expiring out-of-the-money
| JUN | Strike | OTM |
|---|---|---|
| Upper | 112 | 70.6% |
| Lower | 108.5 | 73.1% |
The risk/reward ratio is 1.5:1. The premium from the sale was $0.38, with shares trading at $110.27/
Two exchange-traded funds, the Guggenheim CurrencyShares Euro Trust (FXE), which tracks the Euro, and the iShares Dow Jones US Real Estate ETF (IYR), which tracks the housing sector, have sufficiently high implied volatility to support a selling options for a credit.
I shall use the SEP monthly series of options, which trades for the last time 39 days hence, on Sept. 18.
[European debt crisis, real estate property cycle in Wikipedia]
FXE
Ranges
Click on chart to enlarge.
 |
| FXE at 1:20 p.m. New York time, 30 days hourly bars |
In calculating the standard deviation ranges, I used the time to expiration of the July options -- 39 days -- even though the September options of the position have much further to go. I
I used the September options for the trade, because it gave me higher premium. However, I intend to exit the position before the July expiration. The later option series slows time decay. But a collapse in implied volatility will increase potential profit.
The change lessened the odds of the position expiring out of the money for maximum profit while more than doubling the premium. The usual give and take of risk management.
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 115.46 | 120.58 | 111.18 |
| Lower | 105.24 | 100.12 | 106.38 |
| Gain/loss | 4.6% | 9.3% |
The Trade
The zone of profit in the proposed trade covers a $4.50 move either way, 3.7 times the average true daily price range of the fund. The largest continuous move of the past year was a $6.95 decline over six days, an average of $1.16 per day.
sold for a credit and expiring Sept. 19
Probability of expiring out-of-the-money
| SEP | Strike | OTM |
|---|---|---|
| Upper | 115 | 74.8% |
| Lower | 106 | 72.6% |
The premium is $2.218. The stock at the time of the trade was priced at $110.71.
IYR
Ranges
Click on chart to enlarge.
 |
| IYR at 1:40 p.m. New York time, 30 days hourly bars |
| Week | SD1 68.2% | SD2 95% | Chart |
|---|---|---|---|
| Upper | 78.14 | 82.72 | 77.06 |
| Lower | 68.98 | 64.40 | 73.17 |
| Gain/loss | 6.2% | 12.5% |
The Trade
Aiming for the standard 85% or so chance of expiring out of the money for maximum profit, I get the following trade.
sold for a credit and expiring July 18
Probability of expiring out-of-the-money
| JUL | Strike | OTM |
|---|---|---|
| Upper | 77 | 87.1% |
| Lower | 69 | 80.6% |
The premium is $0.58. The stock at the time of analysis was priced at $73.53.
The zone of profit in the proposed trade covers a $4 move either way, 4.3 times the average true daily price range. The biggest rapid decline of the past year was $4.29 over six days, a 72 cent daily average.
Decision for My Account
I've opened a position in FXE as described above. I'm declining to open a position in IYR because the premium is so low. I prefer a premium of at least $1.00.
-- Tim Bovee, Portland, Oregon, June 8, 2015
References
My volatility trading rules can be read here.
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Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.License
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Based on a work at www.timbovee.com.
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