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REAL-WORLD TRADING: Trading Sideways Markets with a Condor, Part IV

By Joel Addison, Optionetics.com | Wed September 25, 2002 8:00AM PT

It’s now been three weeks since we first started tracking a mock trade on Millennium Pharmaceuticals (MLNM). We started this trade to show how a condor strategy works, since MLNM had been trading in a range from about $9 to $15. The condor we set up is listed below, with the week-to-week data for the trade.

September 10, 2002
Stock Price: 11.61
Buy 10 Oct 7.50 Calls @ 4.40 = $4,400
Sell 10 Oct 10 Calls @ 2.30 = -$2,300
Sell 10 Oct 12.50 Calls @ 1.00 = -$1,000
Buy 10 Oct 15 Calls @ 0.35 = $350
Net Debit = $1,450
Max Profit = $1,050
Max Profit Range = $10 to $12.50
Downside Breakeven = 8.95
Upside Breakeven = 13.55

September 17, 2002
Stock Price: 9.76
10 Oct 7.50 Calls @ 2.55 = $2,550
10 Oct 10 Calls @ 1.00 = -$1,000
10 Oct 12.50 Calls @ 0.30 = -$300
10 Oct 15 Calls @ 0.00 = $0.00
Net Debit = $1,450
Current Value = $1,250
Profit/Loss = -$200 or –13.79%
Max Profit Range = $10 to $12.50
Downside Breakeven = 8.
Upside Breakeven = 13.55

September 24, 2002
Stock Price: 8.75
10 Oct 7.50 Calls @ 1.65 = $1,650
10 Oct 10 Calls @ 0.50 = -$500
10 Oct 12.50 Calls @ 0.10 = -$100
10 Oct 15 Calls @ 0.05 = $50
Net Debit = $1,450
Current Value = $1,100
Profit/Loss = -$350 or –24.14%
Max Profit Range = $10 to $12.50
Downside Breakeven = 8.95
Upside Breakeven = 13.55

MLNM has fallen nearly 25 percent since we first discussed the trade. This obviously is not what we want from a condor trade, as the idea is to see the stock remain in a trading range. Nonetheless, even though the stock has fallen to the bottom of its range, this trade is only down 25 percent. Below is a chart showing the stock movement and risk graph of our MLNM condor.

There aren’t a whole lot of adjustments that can be made to a condor, but there are decisions to be made. First, do we feel the stock is going to turn around, or do we expect it to continue downward from here? If we see lower prices until expiration, then we would want to close the trade for a loss. It is better to lose 25 percent than the whole enchilada. However, depending on the size of our trade, commissions could be a factor, so be aware of this. At this point, I would stand pat, waiting to see what the next week brings. MLNM is at a key point and could just as easily reverse course as head lower. In order for our max loss to be reached, the stock would have to close below $7.50, which is another 14 percent decline. There has been little news on the stock of late, telling me the selling is more market related, which could lead to a bounce at any time. In late July, MLNM also moved to the $9 range, but then moved back up into its normal range.

Some traders may have loss limits that they put on trades and this is fine. Traders should be consistent in their trading rules. However, we need to make sure the rule fits the trade. A 25 percent loss limit on a bull call spread may be too tight, whereas; 25 percent may be good for a condor. Many traders use a 50 percent loss limit, but this is a personal decisions. However, if you do limit your losses at a certain percentage, make sure to include commissions when trading a condor.

There are strategies that are easily adjusted and need constant attention, and then there are strategies that are entered and then watched occasionally. A condor falls under the latter description. Though we have watched MLNM fall drastically, it still is in a position to profit with just a minor move higher. This is the nice thing about a condor trade. In fact, it MLNM does nothing in the next few weeks, closing at 9.00 at expiration, we actually would break even on this trade.

Jody Osborne
Senior Writer & Options Strategist
Optionetics.com ~ Your Options Education Site
Visit Jody Osborne’s Forum

To search for previous articles in this series, please click here.



Recent articles by Joel Addison, Optionetics.com

September 25, 2002  -  MARKET INSIGHT: Beware of Falling Bulls
September 24, 2002  -  HOT SHOTS: EDS Takes Another Fall
September 23, 2002  -  NASDAQ NEWS: Naz Falls to Six-Year Low
September 23, 2002  -  Weekly Outlook, September 22
September 20, 2002  -  VOLATILITY ALERT: Markets Fall for Fourth Straight Week


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