A Good Trade That Went Wrong?

Is this a good trade that went wrong?

Day 1: 12-Mar-2014 N225 : 14853 (-370 or -2.43%)

I have been waiting for this big drop (>2% drop) for many days/weeks.  Implied Volatility (IV) has shot up (somehow I didn't capture all the IV.  will need to find out where else I can get it).  I immediately sold a Iron Condor with good credit of 40 points.


Implied Volatility :
Iron Condor (40 credit : JPY 400,000, ROM 53%)
10 N225 16000/16250 Bear Call Spread (Delta 11.43/7.23) : 20
10 N225 13500/13250 Bull Put Spread (Delta 12.80/9.47) : 20


Day 2: 13-Mar-2014 N225 : 14816 (-13.74 or -0.09%)

Implied Volatility :
Iron Condor (46 credit) : Loss of 6 pt (JPY 60,000)
10 N225 16000/16250 Bear Call Spread (Delta 10.89/6.85) : 23
10 N225 13500/13250 Bull Put Spread (Delta 11.65/8.51) : 23



Day 3: 13-Mar-2014 N225 : 14327.18 (-488.80 or -3.30%)

Implied Volatility :
Iron Condor (53 credit) : Loss of 13 pt (JPY 130,000)
10 N225 16000/16250 Bear Call Spread (Delta 4.53/2.80) : 8
10 N225 13500/13250 Bull Put Spread (Delta 24.94/19.16) : 45

The drop of 488.80 points (or 3.30%) is making this Iron Condor very uncomfortable.  Delta is almost 25, which is my adjustment trigger point (Don't let Deltas go over 25 to 30).  And N225 is only 827 points away from the Short Put Strike of 13500.


Day 4: 17-Mar-2014 N225 : 14277.52 (-50.14 or -0.35%)

Implied Volatility :
Iron Condor (48 credit) : Loss of 8 pt (JPY 80,000)
10 N225 16000/16250 Bear Call Spread (Delta 3.97/2.49) : 8
10 N225 13500/13250 Bull Put Spread (Delta 24.65/18.20) : 40

I decided to adjust : taking the 8pt loss and open a new Iron Condor.

Iron Condor (34 credit : JPY 340,000, ROM 45%)
10 N225 15500/15750 Bear Call Spread (Delta 10.18/6.44) : 17
10 N225 12750/12500 Bull Put Spread (Delta 10.02/7.38) : 17

Day 5: 18-Mar-2014 N225 : 14409.43 (+131.76 or 0.92%)

Did I adjust too early?

K200 limited Strike Price a problem

The limited number of available Strike Price in K200 is a major problem to trade Iron Condor out-of-the-money.  It will be difficult to perform adjustment such as rolling out.

The K200 Options Specification says "Upon the admission of the options, at least 13 strike prices(six are in-the-money, one is at-the-money and six are out-of-the-money) shall be set at interval of 2.5 points for the three consecutive near-term month contracts".

Refer the the Option Chain as 17-Mar-2014 above.  There are only six out-of-the-money Strike Price for Put Options in May contracts.  There is no Delta 10 (-0.1000) or lower contract.  The lowest you get is 16 (-0.1615).

So, to trade Iron Condor for May contract, one may need to legging, start selling Call Spread first, then sell Put Spread when it is available.

I received an assignment notice for Nikkei 225 Option

Today I received an assignment notice from my broker that my short option contract on Nikkei 225 (N225) which expired yesterday, 13-Mar-2014.

Was I surprised?  Yes and No.

Yes because N225 is a cash settlement option.  So, I should not be 'assigned' to buy the Nikkei Index component stocks.  After I clarified with the broker, I need not take any action.

No because while N225 close at 14,815.98 on 13-Mar-2014 Japan time, which is about 300+ points above my Strike of 14,500,

N225 Daily as at 13-Mar-2014

SPX Daily as at 13-Mar-2014

SPX close 21.86 point down on 13-Mar-2014 US time.  So, N225 should 'crash' more than 300+ points when N225 open for trading on 14-Mar-2014 Japan time.  There is a high chance that it will hit my Strike.

For most Index options, the settlement price is the opening price on the business day following the last trading day.  N225 final settlement price is 14,429.87 (Special Quotations) on 14-Mar-2014.  70.13 points below by Strike of 14,500.  I suffered a loss of JPY 70,130 or USD 689.10 for this contract.

On the expiration day, 13-Mar-2014, I can close this N225 Mar13'14 14500/14250 Put Spread for a profit of JPY 8,600 (~USD 83.94) with a 8 Days on Trade, 11% Return on Margin (ROM).  With the full Iron Condor (including 15750/16000 Call Spread), it will be JPY 36,200 (~USD 353.34), 48% Return on Margin with a 8 Days on Trade.

I didn't.  Because it was the expiration day.  Because delta is only -0.0548.  These are good reasons to stay in the trade.

But not good enough when N225 is just 300+ away from my Short Strike.  A down day for N225 could be easily 300-500 points.

Worst still, when we are talking about a spread of 4 points, JPY 4,200 (~USD 41.27) reward that we are taking the risk.

Mark Wolfinger of "The Rookie's Guide to Options" advice not to risk another day (even on the expiration day) for a penny even when your Strike is quite far away.  You don't know what will happen tomorrow.  Michael Benlifa in his book "Profiting with Iron Condor Options" also advice to take profit when it reach your targeted ROM.

A good lesson learned.  A good experience of being assigned.  A good understanding of it is the next day opening price that matters for Index Options.

Trading Options At Expiration

Read the book "Trading Options At Expiration" by Jeff Augen.  In this book,  Jeff discussed the three major forces that happens during Expiration day:

• Implied Volatility collapse
• Strike Price pinning effects
• Rapidly accelerating Time Decay

This is a totally new concept for me as it involves trading option on that single day.  That is a Day Trading options.  I am not ready to day trading options.  Making a note here to revisit at later time.

Two Out of Three

The following are ideas from the book "Profiting with Iron Condor Options", by Michael Benlifa.  I am summarizing the idea and trying to put in into practice in my Trading Plan.  Most of the time you cannot get the perfect trade three out of three considerations below.  You got to choose just two out of three.  Which two?

The three considerations when selling Iron Condors are :

1. Position : Delta 10s, outside previous highs and lows
2. Price: Credit of 20% of margin
3. Time : Expiration is in 4 to 5 weeks

Michael suggest the first two : Position and Price, leaving Time negotiable.

N225 Index Option Review

After decided not to trade HSI Index Option, I continue to explore another market/product for Option trading, the Nikkei 225.

Option Spec: (http://www.ose.or.jp/e/derivative/225options)

• Exercise Style : European
• Contract unit : JPY 1,000 per index point
• Minimum Spread : 125 point, ie JPY 125,000 (~USD 1221.42)
• Trading Hours : 9:00-15:15, 16:30-3:00 (Japan Hours)

Cost of Trading
1. Market Data JPY 200.00 (~USD 1.95)
- Osaka Sec Exch JPY 200.00

N225 Market Data cost is ok.  Not too high.  About on par with US Options.  For example, Korea is free, Singapore is SGD 1.00 (~USD0.78) and US Bundle (USD 10.00)  & US Options (USD 1.50) are waived when monthly commission generated reached USD 30.00 & USD 20.00 respectively.

2. Commission
- N225 commission is also not bad.
- 0.18% of option value, min JPY 100 (~USD 0.98) per order
- 0.2% of option value, min KRW 1,000 (~USD 0.93) per order

For a 10% premium collected from Credit Spread,
- N225 commission will take 1% away from the 10% premium received, ie for every $100 premium received, $1 will be deducted for commission.
- K200 commission will only take about 0.76% (depending on contract value) from the premium, ie for every $100 premium received, only about $0.76 is deducted for commission.

3. Margin
- N225 margin is good
- for a N225 Option 125pt Spread (min spread), the Initial & Maintenance margin is about USD 463 & USD 370 respectively
- for a K200 Option 2.5pt Spread (min spread), the Initial & Maintenance margin is about USD 637 & USD 510 respectively

For N225 Option, selling a 125pt Spread to receive say 15 pt (cannot do 12.5 pt. so, 12% premium) is about JPY 15,000 (~USD 146.57), I will need to tied up USD 463/370 initial/maintenance margin.  Return On Margin (ROM) is 31.65%/39.61%.

For K200 Option, selling a 2.5pt Spread to receive say 0.3 pt (adjust to 12% premium as N225) is about KRW 150,000 (~USD 139.90), I will need to tie up USD 637/510 initial/maintenance margin.  Return On Margin (ROM) is 21.96%/27.43%.

4. Option price spread and volume
As with K200, the bid/ask spead is very close, mostly 1-2 ticks wide.  Bid and Ask volume is also good.

Risk/Reward
1. Spread Risk
- min spread is 125 points, which equate to JPY JPY 125,000 (~USD 1221.42) 
- K200 min spead is 2.5 points, which equate to KRW 1,250,000 (~USD 1,165.39)
- this is about the same

2.  Support & Resistance
- as my selection of Strike is primary base on Support & Resistance (that may change), the validity of Support & Resistance is important
- N225 is in general similar to K200, with enough up & down (volatility) but at the same with good support & resistance.

3. Number of Strikes
One problem I have with K200 is the number of Strikes.  It is quite limited.  It is about 26 strike prices(current month) and 18 strike prices (next month).  This make adjustment kind of challenging at times.
N225 does not has this problem.  It has abundant of Strikes to trade.

4. Trading Hours
N225 Trading hours coincide with K200 for T-session (regular trading hours), where the Index is moving.  However, N225 has a T+1 session (non-regular trading hours) that you can continue to trade, even though spread and volume is not as good as T-session. 


Conclusion
N225 Option in many ways are comparable as K200, and better in some areas.  As such, I will be trading N225 in addition to K200.

Karen SuperTrader, February 11, 2014

There is a recent interview with Karen, the SuperTrader on February 11, 2014 on tastytrade.  I cannot find the YouTube version for this recent interview.  You can view the interview at tastytrade.  Need a account to login though.

https://www.tastytrade.com/tt/shows/tasty-extras/episodes/9236