This article is a follow up to last week’s which explored the similarities and differences between 2 similar iron condors on the RUT and it’s exchange traded fund counterpart, the IWM. Previously we discussed the entry. Here we will focus on the outcome of the trades, comparing their bottom line rates of return. The second segment of this article delves into what could have happened if the RUT put leg had been left open and went sour.
The Exits Once again both the RUT’s iron condor and IWM’s are looked at separately, starting with Figure 1 which shows the outcome on the Russell 2000 cash-settled index.
Iron Condor on the RUT Exit BTO + 1 Apr wk A 850call @ 1.05 STO – 1 Apr wk A 845call @ 1.67 BTC + 1 Apr wk A 845 call @ 0.05 RUT on (3-29-12) $828.78 STO -1 Apr wk A 795 put @ 2.34 BTC + 1 Apr wk A 795 put @ 0.05 BTO +1 Apr wk A 790 put @ 1.88 Max Profit = 1.08 Max Loss = 3.92 Actual Profit = 0.98 ROR = 28% minus commissions Actual ROR = 24% minus comm.
Figure 1: RUT’s Iron Condor outcome
On the left is the entry with the initial calculation of rate of return (ROR) being 28%. On the right, we see that two sold legs, the obligation call and the obligation put, were bought back for a nickel each; hence, reducing the original Maximum Profit by a dime. The credit kept also changes the ROR by about four percent; so the true ROR at the end of this trade is 24%. Again, commissions are not taken into account in this equation, but in real trading they are a significant part of the final calculation.
Next, let us move on to the outcome of the trade on the Russell 2000’s exchange traded fund, IWM, which trades at one-tenth of the RUT… Continue Reading
