A Surprising Win

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Yesterday’s trades provided a too-good-to-be-true profit. Today we’ll take a close look at what happened. Our trading activity was complicated. It involved three vertical credit spreads. We’ll look at them and see what happened.

First, let’s review the two trades that formed our iron condor. We received a combined credit of $145, which we expected would have been our profit had both legs of IC expired with the SPX priced between the two short strikes.

SPX closed yesterday at 3585.62, which was below the short strike of 3600 on the put side of our IC. When the price of SPX hit 3600, an order to close the put vertical was automatically submitted and received the following fill:

The order gave us debit of $140, leaving us with with a $5.00 profit. Fees would have been $3.90 (6*$0.65). Our net was a paltry $1.10, after the call side of the trade expired worthless. The mechanics here are the same as what we experienced last week on Thursday’s trade.

I watched the trade late in the afternoon as the SPX’s price slide closer and closer to the 3600 stop, and decided to try something new. I opened a third credit spread that I’ll call the Rescue Trade. Here’s what I ordered:

The concept behind this order is complicated. You might notice that it uses the same strike prices as the put spread from our original trade. Except instead of trading puts, it trades calls. This is a bearish spread that returns its max profit when the underlying trades below the 3595 short strike. That profit begins to decline when SPX’s price rises above 3595 and the trade reaches max loss at 3600. This is the exact opposite of how the complimentary put spread reacts to price change.

When I wrote the order, high gamma drove SPX option prices up and down wildly. I chose $4.75 as my limit price in hopes that this credit would not only cover the likely loss on the put spread spread, but add to our overall profit. I really didn’t expect to get a fill on this order. However, submitting the order was risk free. If it didn’t fill, the original trading plan would complete and we’d either make our intended profit or break close to even when the put spread struck out. If the order filled, we stood to make a handy profit. I was amazed when the order filled a little over 15 minutes after it was submitted. It filled at $5.70, well above the limit price. I think this fill is too good to be true, that it may be some artifact of the paper trading environment we are experimenting in. And I’m not even sure that we would have gotten the $4.75 fill I requested on the limit order.

Here’s a rundown of all the trades:

The call trades all expired worthless, leaving us with our credits for them. The put vertical stopped out at a loss. Adding the credits and subtracting the debits gives a net profit of $575 before applying transaction fees.

Yes, it makes me giddy, but I’d be negligent not warn that what I’ve done here would have risked assignment and exercise at expiration in an underlying that wasn’t cash settled.

Key take-way: Don’t let giddiness distract from managing risk, but be willing to assume marginal risk to save a trade.