Wednesday, May 13, 2009

Maybe Time to Adjust on RIMM Iron Condor

Yesterday was the day for me to start thinking about possible adjustments...Have I made any yet...? NO...Do I need to take action right away...? Maybe. Regardless, I was away from my computer all day yesterday, and really was not looking at want the market did. However, last night I was able to check out the moves and news, and saw that RIMM moved below 70 and had an intraday double bottom. Then today, RIMM dropped below 70 early and hovered there till the close. This kind of move in a lot of cases will promote panic, and a lot of the time cause me to make a miscalculated move. So I now take the time to look at the trade, look at my exit plan that was thought of before placing the trade and crunch the numbers to see what my possibilities are...

Possible Adjustments:
Step 1: Where does the trade stand?
RIMM closed today (5/13) at 69.09
The total credit in the trade is 1.50 this means that my lower breakeven is not been met yet, BUT the trade looks negative. Meaning if I were to close the whole trade now I would lose more then just commissions. Why? because of something called Extrinsic Value or Time Value (The component of the premium paid for an option that reflects the value of time remaining before expiration.)
With the remaining time left till the options expire and that the stock has dropped about 5% since the close on Monday. There has been a bit of premium build up in the option since the position was opened on the 6th.

Step 2: How much will I loss? If anything.
The Bear Call side of the Iron Condor is basically worthless...So no need to take any action there. It is the Bull Put side of the Iron Condor that I am concerned about...I only received a $.034 credit for this side of the trade when it was opened and If I were to close it now, it would cost approximately $1.70 plus commissions. So assuming I closed this side of the trade and that the bear call did indeed expire worthless...I would lose about $0.20 plus commissions on 6 legs. 4 legs when opened the trade, and 2 more legs to close. If I am paying $1.00 per contract and I have a total of 10 contracts per leg that would be an added $60.00 that I need to account for.
Total loss = $0.20 x 1000 shares + $60.00 That is $260.00 Loss

This is not to bad when you consider losing the max risk in the trade, which is 3.50 per share at 1000 shares that is $3,500 on the line. So I very easily could close the trade early and walk away with no big worries.

The Bottom Line:
For the next 2 days I will be looking to exit this trade with as little out of pocket cost possible. That may be Thursday or Friday...I don't want to Roll the Bull Put side of the trade out to June because of earnings that month.
The action I will take if RIMM stays below 70 before expiration will be:
Sell To Close (STC) 65 Long Put for the bid price
Buy To Close (BTC) 70 Short Put for the ask price
What ever the values are or will be at the time. I don't like to set up limit orders in this situation. I want out when I submit the order.

If you have any questions please contact me via email at coachnuge@gmail.com
Private Tutoring is available.
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