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January 21st, 2011 at 8:08 pm
oburlacu –
We started with the Iron Condor, but then have about a 4.1% drop in the RUT, which made our Bear Call Spreads profitable and giving us almost the full value in just 5 days. There was no reason to hold on to that. If the market reverses we can put back the Call spread and pick up additional premium or the insurance we bought which is practically worthless now will make us money. We modeled moving down and picking up additional credit at the 840/830 level but decided against it, since we still have about 4 weeks to go, and we thought the risk reward does not justify it.
At this point we need to manage the bull put spreads, since if the RUT is in a down trend then we have to either buy insurance, roll down the put and established another call credit spread to compensate for the loss (back to an Iron Condor), or just take off the whole trade entirely till the market calms down.
Our goal with these trades is not to take a catastrophic loss, since we can make money about 80% of the time.