Brexit exit iron condor

The pound has been relatively flat for a month after the initial Brexit trauma, so we are considering a “Brexit exit” on our existing iron condor. Currently the iron condor is in the middle of it’s range, as the FXB is at $129 and the mid point of our iron condor is $130. Volatility has contracted from 30% on the brexit announcement to around 15% and trending lower towards the original pre brexit range of 8% to 10% implied volatility.

FXB volatility

Looking at the historical FXB implied volatility chart clearly shows the huge peak for Brexit

Brexit exit FXB Aug 2016 Adjusted Iron Condor Volatility Analysis - 20160801

Given that our continued assumption is bearish on the pound, it makes sense to exit the iron condor before it sells off any further. Also the implied volatility contraction from a peak of 30% down to about 15% makes it more attractive to buy back the short option premium.

From our previous post the original trade was an iron condor at $149/$144/$130/$125 was placed on 16th June (pre brexit). Iron condor was adjusted on 27th June (FXB adjustment is in section “Brexit trading update – Monday”) by adding bull call spread $148/$143 and short call spread $135/$130.

FXB trade exit

The $130/$135 short out spread was slightly ITM giving the trade a slightly bullish deltas, and since our assumption is still bearish we are ok to close out the entire trade for a profit. Given that FXB moved more than 15% after brexit, this is definitely a good result. We could leave on the short call spread $130/$135 to keep short position on the table. However we are trying to more disciplined with our trading approach of “on as a package” and “off as a package” for option strategies. Adjustments to strategies in mid trade are ok, but fundamentally it is cleaner to exit and entry all option legs together. This ATM spread that had been already adjusted on with a short call spread vertical $130/$135, was taken off for a loss of -$73.

Brexit exit FXB Aug 2016 Adjusted Iron Condor ATM trade exit - 20160801

The call spread structure at $140 level is mostly worthless now. The generated a $216 profit and can be easily bought back for $50. It probably would be more logically to let the whole thing expire worthless because it’s way out of the money now, but in the interests of housekeeping we will exit now (on the same day the other side is exited). You could easily back an argument for doing nothing with this side of it, but we don’t have the patience to wait 40 days for it to expire to make only $50. All option legs of the entire OTM spread including the long call spread adjustment at $148/$149 was taken off for a gain of $216.

Brexit exit FXB Aug 2016 Adjusted Iron Condor OTM trade exit - 20160801

Brexit exit trade summary

In summary entire trade was exited for a $144 ($216 – $72) total profit across all options legs, but only with $200 at risk after each trade adjustment was applied (so it was a very safe trade). Without a trade adjustment this would have been a $36 winner, however with the potential max risk of approx $600. So in this case the adjustments ultimately made more money due to selling premium and importantly lower the overall max risk on the trade. This shows how in a volatile trading environment adjusting spread by selling premium, can both reduce risk and manage trade profitability. This was only a small profit, but it does show how to manage an option trade successfully even with a 30 day rule.

Brexit trading update – the aftermath

This will be the final general Brexit trading update – after this will resume general separate trade updates, but just wanted to get down all the trading moves made since last Friday and this week.

In summary it is a political mess in UK following Brexit. Prime minister resigned, opposition leader under threat for not campaigning strong enough for stay vote and Scotland threatening to veto the decision. On top of that Europeans telling UK to get on with a timetable for leaving. Not to mention the final hammerblow of England losing to Iceland in Euro 2016 (Brexit likely not as traumatic as the football exit for some people…).

However .. on to the trade update. If your trading account is still alive after the last few days after brexit… Congratulations! We were NOT expecting a leave vote to win, however we have to adjust our positions. Fortunately the implied volatility is still sky high on currencies and equities, so adjusting by selling premium is not that hard.

We are now now bearish USDGBP for the next few months. Not betting on immediate rebound. Any rallies are to be sold. There will probably be huge counter trend rallies based on discussions or actual BOE currency intervention, however those should be taken as a opportunity to short at higher levels. Limited risk reward with all bearish trades (eg call spreads or put / put spreads). Also medium term bearish on UK equities, but fallout from US equities will almost certainly be less for US versus UK. Not convinced that US market will react dramatically to Brexit over next few months (isn’t not likely on it’s own to cause a bear market). Would like to do short premium trades that take advantage of the high implied volatility env. Once again… if your trading account is still alive after the last few days of trading brexit your risk management rules are working.

Our portfolio had a relatively large number of short premium strategies going into the vote. These had to have minor some adjustments after the vote, which we did relatively quickly in most cases. There were also some strategic portfolio hedges to protect existing long positions that were quickly added on the Friday after Brexit (fortunately at pretty decent prices). Here are the trades we actually did …

Brexit trading update – Friday

Hedged our entire GBP cash position with a combination futures trade. This was hedged at 1.385 into the bounce on Friday morning at much better prices than overnight.
Brexit trading update - 6B Jun 2016 Bear Call Spread and Put - chart trade entry - 20160624

The combination /6B futures trade was needed to have full downside protection – without over paying TOO much for volatility (although some volatility premium needed to be sacrificed to hedge against total free fall).
Brexit trading update - 6B Jun 2016 Bear Call Spread and Put - trade entry - 20160624

Added these two bearish trades with a SPY put butterfly in the morning and IWM put butterfly near the close. These have no downside risk and were added when vol was high so could get strikes wide apart.

SPY put butterfly
Brexit trading update - SPY Jun 2016 Put Butterfly trade entry - 20160624

IWM put butterfly
Brexit trading update - IWM Jun 2016 Put Butterfly trade entry - 20160624

Hedged our entire Canadian dollar real estate position with a combination futures trade. This might be an over reaction to Brexit because the Canada/USA economic trading relationship is not likely to be directly affected. However if the market goes into “risk on” mode and oil prices decline then the USDCAD rate would suffer.
Brexit trading update - 6C Jun 2016 Bear Call Spread and Put - trade entry - 20160624

Brexit trading update – Monday

Shorted ATM volatility by adding a short call spread against the tested side of our existing FXB iron condor placed prior to Brexit. Also locked in a guaranteed profit on the short call spread by buying a very cheap call vertical. This is our way of rolling down within the confines of the 30 day rule – without this rule you’d just close out the call spread, and re-sell it at the lower strike. Trade has only $203 risk now:
Brexit trading update - FXB Jun 2016 Iron Condor trade adjustment - 20160627

Sold a QQQ iron condor similar to Tasty Trade’s good trade / bad trade – not our idea, but will take it.
Brexit trading update - QQQ Jun 2016 Iron Condor trade trade entry - 20160627

Short TLT bond call spread – don’t really like this trade from risk/reward (doesnt make much even if right) but just trying to sell bond premium in high vol with limited risk (and start a very small short position at recent all time highs).
Brexit trading update - TLT Jun 2016 Bear Call Spread trade entry - 20160627

Brexit trading update – Tuesday

Didn’t do much because implied volatility had contracted quite a bit, so there wasn’t that much premium to sell. Still not happy with QQQ and TLT positions – slight rise in market or bonds is going to hurt these positions.

Brexit trading update – Wednesday

Didn’t do much, big market rally again. Implied volatility reduced again. Sitting on hands for now. GBP rally somewhat muted given general “risk off” market rally.

Brexit trading update – Thursday

Portfolio is now getting too short for comfort – we have also iron condor established early in June in XME, EWZ that are rallying hard through the short call strike today. Adjusted the QQQ iron condor established on Monday to get some more long deltas in the portfolio.
Brexit trading update - QQQ Jun 2016 Iron Condor trade adjustment - 20160630

Brexit trading update – conclusion

Handled the actual event pretty well, but was caught off guard a bit because do not expect this massive bounce. Lost about 1% of the account in the bounce because pushing too hard on the short side (but that was arguably justifed given the initial market reaction). Ironic though because through out actual brexit in about Monday – the account was flat to slightly up. So navigated it pretty well initially, but frustrated to be losing money in last couple of days when did so relatively well on the initial reaction. Live and learn – and definitely not a write off experience.

Yet another Brexit Trade

Yet another Brexit trade! This is an interesting medium term trade idea – betting that the current hype around June 23rd Brexit poll in the UK is overstated. For the record personally don’t think that United Kingdom (uk) would vote for an eu exit. However there was a poll last Friday that had the leave campaign 10 points ahead.

Therefore due to the perceived risk of an exit the pound and stock markets sold off. Happily for our proposed trading strategy the implied volatility of the options has gone through the roof.

Typically on average implied volatility on options is overstated – and especially for know binary events (like stock earnings or polls). Therefore is makes sense to look at selling options, however with a potential huge move in event of a leave down you would not want to have unlimited risk. The aim is to “safely” sell premium without being on the hook for significant out sized moves of unknown magnitude.

The trade is do a longer term iron condor in FXB options. The only option cycles that are more than 30 days out and available this week are July 2016 (32 days) and Sept 2016 (90 days). Therefore we will pick Sept 2016 (90 days). This is the trade entered on June 15th:

FXB Jun 2016 Iron Condor Brexit trade entry - 20160615

There is still time to do a similar Brexit trade before Jun 23rd this week, as the option will likely remain highly bid up in price into the announcement.

Typically with a 30 day rule would like to give ourselves some wiggle room to exit the trade after the 30 day period has elapsed. This typically means a minimum of a couple of weeks after 30 day period to allow a strategic exit.
Is it possible to do options with only (for example) 32 days to option expiration, but then you have only 2 days at the end for trade exit and you end up very close to option expiration where the gamma risk is very high. We could wait for August 2016 cycle to appear after this June 17th option expiration, but we’d like to get trade on this week as implied volatility looks quite rich.

This Brexit trade is focused on the markets expectation of big move on the announcement itself. The assumption is that result is “stay” (status quo) and that after the announcement the implied volatility of the options reduces and the pound ultimately settles in a range after the announcement. It is important to recognise that the trade could instantly lose money on the announcement but this is capped due to the limited risk nature of an iron condor. There could be a lot of movement in the spread but the bet is that over about 30 days the pins will be in a similar trading range between 1.30 on down side and 1.46 on up side. If there is a sustained violent move in either direction this trade will lose. However according to option pricing on order entry it is has 60% probability of finishing inside the defined range by option expiration, so probability is higher to take a profit at some point during the trade lifecycle. After 30 days and up to 90 days it could move around inside the range if volatility collapses after the announcement as expected it could make money even if it trades outside the range, due to lower option premiums due a volatility crush. There are a lot of variables that make taking a profit on the trade a possibility between now and September.

Brexit Trade – Possible adjustments

Given that this has 90 days to option expiration there are plenty of opportunities to adjust. Typically this would be selling more premium to improve credit received. Even if the trade moved slightly outside the range, sometimes adjustments can be made. This would usually be done by turning the untested side into a butterfly, then selling a vertical close to the money to bring in more option credit. For example if FXB move rapidly upward this what we would do for our trade:
1) purchase a new cheap put vertical otm (to neuralise any downside risk from the existing short put spread).
2) sell a put spread closer to the money to bring in more credit.
This would increase the credit received AND make the trade initially more price direction neutral.

However given that this Brexit trade is limited risk reward it does not HAVE to be adjusted. If goes massively against us initially on the announcement we may have to be content with taking close to max loss. in a very extreme directional move (either way) sometimes there is no good adjustment with an iron condor. Therefore there is some risk that can’t be predicted, however is it limited to the known max loss on trade entry – as long as you are comfortable with the initial risk you shouldn’t have to worry too much about this trade over the actual announcement.

Brexit Trade – Trade Entry – Wednesday June 15th

FXB options are pretty lightly traded and typically have low volume and open interest. Trade entry is always extremely important to the overall iron condor strategy, but very important in more illiquid products. The best strategy is not to rush into getting filled as soon as possible – the trade duration is 90 days so the iron condor pricing will typically not move that significantly in one trading day on options that are that far out in time.
It is very important not to use a market order for this trade because you will get killed on the execution price. A good approach is use a day limit order to enter the iron condor, then cancel and correct if multiple times to get close to best available price. One of the interesting things we have noticed getting filled on illiquid options is that sometimes you can fills above what is considered fair mid price. So it is a good idea to start about 10% over fair value and work down in $0.01 or $0.02 increments. For example of the mid point credit offered is $4.00, start at $4.40 and work down towards $4.00, then keep adjusting down until you get filled. When you get close to mid price and the order hasn’t filled yet, you can leave an order in there for a few minutes to see if it will fill. If it doesn’t fill then just cancel and correct it again for a slightly lower credit. If it doesn’t fill, repeat for a lower credit. Obviously you don’t want to take all day to get the trade done. However in the long run it pays not to be too impatient with this approach, because over multiple trades the savings will add up.

The following is a general trading tip that admittedly only have our own experience to go on, but seems to hold true so far. We have noticed that option spreads in these less liquid currency ETF spreads (like FXB) tend to be a bit wider on the open between 9.30 and 9.45 and the close between 3.45 and 4. The guess is that market makers in these currency ETFs would like to get paid a bit more for hedging the illiquid option risk, especially overnight currency moves are digested. So it is typically easier to get slightly tighter fills on iron condors between 10am and 3pm, and we like to use 11.30 to 1pm (NY lunchtime) because on average the market seems slightly quieter.

Brexit Trade – Profit targets

After 30 days in this Brexit trade is reached we can start looking at profit targets. Typically would look to buy to close the entire iron condor by entered a good til cancelled limit order – that will get triggered at say $2. That would give about $2 profit. Even after 30 days the options will still have about 60 days to option expiration, so this is primarily playing a volatility collapse, not time premium decay. The volatility will likely collapse after the announcement so option premium should decrease significantly.

Brexit Trade update – Monday June 20th

Option volatility reduced on Monday as the market perceives that Brexit is less likely. Risk assets (equities) rallied an fear assets (precious metals) declined assuming that a “Remain” vote was priced in. Additionally the pound rallied 2% against the dollar. The lower option premium makes this trade less interesting now than last week. But interestingly the option volatility adjusted down significantly before the announcement (not on the announcement as we initially anticipated). However volatility could pick again after the announcement, but it is most likely to reduce significantly from current 25% implied volatility towards the last years average of about 10%. If this predicted option implied volatility collapse occurs it will help out our trade (even if the actual price moves against us).

Brexit Trade Exit – 18-Apr-2016

Last month Brexit Short Pound Long Euro Trade update we started a medium term trade betting that the pound will trade lower into June Brexit on fear of an exit poll. The trade was to short Great British Pounds (GBP) using 3 E-micro futures /M6B in Jun 2016 (symbol /M6BM6), and long Euro (EUR) using 2 E-micro futures /M6E in Jun 2016 (symbol /M6EM6). Each side had a notional value of approximately $26k USD. The 3:2 ratio is simply chosen so that the notional amounts are identical, because of the different contract size for each currency. Trade entry was 14th March 2016. We originally attempted to hold it as a position trade into the brexit referendum date in June 2016, but if our risk management rules take us out we will exit.

The Great British Pounds (GBP) future was the original short, and we sold Euro (EUR) against it to offset the risk somewhat. Because the Euro moves closely with the Pound over last year, this is a fairly closely correlated pairs trade. Pound is relatively flat for last month, and the euro had rallied a bit.
Recall from last month, we also had also completely hedged with opposite fx positions into the March 17th BOE meeting.

Profit Loss update at end week April 15th

Looking at the overall position on April 15th 2016 approximately 1 month later we have:
$250 profit on short 3 E-micro futures /M6B
$350 profit on long 2 E-micro futures /M6E
-$100 on long pound fx hedge
-$150 on short euro fx hedge

M6B Short April 2016 GBP Brexit Pair 20160415 - trade adjustment

Over this month the Pound has been down about 1% and Euro up about 1.5% (so not a huge amount of movement). However this price movement has given some options to make position adjustments.

M6B Short April 2016 GBP Brexit Pair 20160415 - 1 month correlation

We exited all positions, except the Pound future, for a total profit of $100. Then immediately added a stop to buy back the short pound at 1.4269 (entry was 1.4282). This stop was chosen only to allow for about 0.0013 slippage on the micro future and still guarantee a small profit of about $20 on the short future position. This would give us a total minimum profit of about $120 ($100 + $20) on the entire position, and still gives approximately a 1% wiggle room to the stop. However it is still possible (and potentially likely) to get stopped out, but crucially we can still maintain the short pound position with no risk from the overall trade. If we get stopped out, will likely be able to establish at better levels. If GBPUSD continues to go down, then will have established a decent sized position for no risk – if that happens, then likely would exit before the Brexit decision in next few weeks.

Final (enforced) Exit on Mon Apr 18th

Update: as of Monday, got stopped out this morning at 1.4270 so no longer have any position. Note the 0.0001 slippage from the actual 1.4269 stop. Cannot rely on stops to exit exactly at specified price, so always allow for some slippage between the stop and your required exit price. The slippage is typically dependent on product liquidity and when the stop executes. These FX Micro futures on /M6B are typically liquid with 0.0001 spreads during the day, but appear to move to 0.0002 in overnight US trading. You may get better executions during US hours. For example our execution was with only 0.001 slippage at 10.56am.

Total P&L was $120 – we had locked in a gain originally of $350, but that last adjustment from Friday cost us about $230 in giving back profits. However even though it got stopped out today, we did manage the risk well and ultimately turned the position into a “zero risk” trade.

Trade exit final review on Fri Apr 29th

Reviewing this trade again after the exit 2 weeks ago, shows that the in short term the trade theory was invalidated. The following chart shows how the trade would have moved significantly against it, if we had stayed in it.
M6B Short April 2016 GBP Brexit Pair 20160430 - trade exit review

However we did make a small profit – we might look a retrying this trade soon as these high levels. The importance of our risk management is that we are not emotional scarred from being wrong, so we can evaluate any new trade on its merits, not trying to get back to break even.

Brexit Trade Entry – 14-Mar-2016

This post describes a medium term trade betting that the pound will trade lower on uncertainty into the June 23rd UK referendum on whether to exit the European Union (EU) – dubbed Brexit by the media.

The trade is to short Great British Pounds (GBP) using 3 Micro GBP /M6B futures in Jun 2016 (symbol /M6BM6), and long Euro (EUR) using 2 Micro EUR /M6E futures in Jun 2016 (symbol /M6EM6).

Each side has a notional value of approximately $26k USD. The 3:2 ratio is simply chosen so that the notional amounts are identical, because of the different contract sizes for each currency. Trade entry was 14th March. This idea was from an FX Crosses trade idea from tastytrade.com, but one that we think we can use within our 30 day Rule restrictions. Typically this would be a scalping trade for few hundred dollars over a day or so, but we will attempt to position trade for a month or more.

For the record personally don’t think that United Kingdom (UK) would vote for an European Union (EU) exit, but with numerous exit polls and political statements along the way there will be a lot of uncertainty into the final results announcement on Jun 2016. However we don’t think we have a crystal ball so our personal opinion is not really relevant, therefore trade will be exited early and not wait for final result. This is trade is focused on the expectation of uncertainty into the result not the final result itself. This is a trade to “buy the Rumour, sell the news” trade or more accurately – because part of trade involves shorting pounds – it should be “sell the Rumour, buy back before the news”.

GBP EUR Correlation

The GBP EUR pair has a very tight correlation of about 0.71 in the last year. So what does that mean for our trade ? To recap correlation values typically vary between -1.0 (negative) and 1.0 (positive). A highly positive correlation means that the two products will typically move in the same direction mostly of the time (S&P 500 ETF (SPY) and Nasdaq (QQQ) would be a good example). A highly negative correlation means that the two products typically move in the opposite direction most of the time (S&P 500 ETF (SPY) and Volatility (VXX) would be a good example. Typically you would be looking for pair trades that were either below -0.5 or above 0.5 – because anything in between that range does not give enough of a correlation pattern (it could just be considered noise).

For the following we are using the relative charts of the ETFs FXB (Pound) & FXE (Euro) to show daily moves over a monthly time frame. For our high level correlation analysis, these E-micro futures move almost identically to these ETFs, so they can be considered equal for this analysis.

The GBP EUR pair has a very tight correlation for the 9 months of the last year, but there has been a recent 3 month divergence since Dec 2015:
Brexit - 6B Mar 2016 Pound Euro Pair 20160314 - 1 year correlation

For reference in the last month has extremely tightly correlated:
Brexit - 6B Mar 2016 Pound Euro Pair 20160314 - 1 month correlation

However looking at a zoomed in chart of the last 3 months it is easy to see that GBP has underperformed EUR by about 7%:
Brexit - 6B Mar 2016 Pound Euro Pair 20160314 - 3 month correlation

FED meeting – March 16th

Apart from general market risk, the FX market experiences higher implied volatility and rapid directional moves around central bank announcements. The FED announcement on March 16th and BOE announcement on March 17th will affect this trade.

This trade was not made delta neutral into FED meeting on March 16th. This is because the direction of euro and pound will likely be the same, even if the actual direction is unknown before hand. This trade does not make money guessing direction correctly, it makes money assuming the Pound under performs the Euro in the next month or so. Typically the euro and pound will trade in the same direction, but because we are long/short as a pair in the same amount the direction risk is minimized. It is possible, but not very likely, that the Euro and Pound trade in opposite directions after the FED announcement.

BOE meeting – March 17th

However this trade was made delta neutral before the BOE meeting on March 17th. This was because this is event directly specific to one of the currencies in the trade pair. Remember the aim of the trade is to express the view that the Pound will be weaker than the Euro over the lifetime of the trade into a potential Brexit – however trading central back announcements is just a trade outcome that cant be easily predicted and FX rates react in a very binary way (up or down very quickly). Since this event has the potential to move the GBP side of pair significantly, this introduces unnecessary event risk into our pair, so we will neutralise the trade for the event, and then re-evaluate afterwards.

The trade was totally hedged the night before the event, by purchasing about $26k GBP/USD spot FX and selling about $26k EUR/USD (the exact opposite of our futures position). We cannot exit any trade legs immediately due to the 30 day rule.

At luck would have it, after the BOE meeting at 8am EST on March 17th, GBP moved rapidly higher (i.e. against our original position). By 4pm Thursday compared to 24 hours earlier before the BOE announcement (but after the FED announcement) GBP was 1.53% higher and EUR was 0.76% higher. If we had remained unhedged in the original futures only position into the BOE announcement, this would have lost approximately 0.77% of our trade, or would have lost about $200 of our unrealized $350 profit. However since the trade was now totally delta neutral so our unrealized $350 profit remained, because the spot FX positions exactly offset any movement in the micro futures (as expected).

Brexit Trade Exit – March 17th

Since we have a locked in guaranteed $350 gain, we may just hold the entire structure for a month due 30 day rule then exit with a gain. In future we would also probably just use GBP/USD or EUR/USD spot FX (standard FX trades) versus the Micro GBP /M6B and Micro EUR /M6E futures. Given that the BOE meeting was bullish for GBP we can simply hold this trade with no modifications. However in 30 days time we can reestablish this trade (if we still want to trade the potential Brexit) simply by trading out of the spot FX positions. Alternatively we can just exit all the legs simultaneously and take the profit.