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Today was a huge upside day for the markets. The talking heads attributed this rally to the recent better-than-expected earnings announcements. If you read any of those announcements carefully, there isn't much great news. But all of this is only rationalization after the fact - we should only trade what actually happens. RUT smashed through previous resistance to close at $545.85 and the SPX closed at $976.29, well above its old resistance level. As a result, today was a busy day of adjusting my positions - no more waiting for a pullback; time to preserve capital.

I closed the remaining 10 contracts of the 530/540 calls in my Aug iron condor for $6.10, a $2,000 loss. I then opened 10 contracts of the 590/600 calls for $0.90 or $900. I also sold one of the long Sept $530 calls for $33.60 for a $2,400 gain; I kept one as the hedge for my 10 $570/$580 call spreads, that are now being threatened by this surge upward. I then closed all 20 of the $420/$430 put spreads for $0.20, a $1,500 gain and opened 20 contracts of the $480/$490 puts for $0.90 or $1,800. The end result at the close was a position P/L = -$1,855, delta = +$1, and theta = +$130, so we have the theta/delta ratio back in a healthy position. Notice that our hedges have kept us in the game with the opportunity to salvage a profit before the August expiration month is over.

My Aug iron butterfly also required surgery today. I closed the one remaining $520/$570 call spread for $25.00 and the $530/$580 call spread for $21.00; then I sold two $550/$600 call spreads for $11.80. I closed two $440/$490 put spreads for $2.60 and sold two $460/$510 put spreads for $5.20. Thus, my current position consists of two 530/560 call spreads, two 550/600 call spreads, two 450/500 put spreads and two 460/510 put spreads. This position now stands at a P/L of -$2,290, delta = -$80 and theta = +$89. I like the $89 of theta, but the theta/delta ratio is minimally acceptable. The two 530/560 call spreads are weighing us down. If the RUT continues upward or sideways, I will have to roll those spreads upward.

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Patience is a necessary attribute of good traders as long as we define it properly. Some investors sit on losing positions, hoping the market will turn in their favor - that isn't patience. My iron butterfly and iron condor positions have now been hedged against further increases in the Russell 2000 Index (RUT) for about ten days. For the past two to three trading sessions, our positions have been sitting near the "tipping point" - not quite at the point of closing the positions and accepting the loss, but not yet at the point of removing our insurance either. Once you have properly hedged your positions, it takes patience to then give the market time to establish a direction that will drive your decision. Patience allows you to trade what the market gives you, rather than jumping into a trade based on your prediction of the market's next move.

RUT closed at $528.70 today after running as high as $531. Pull up the RUT chart and note that the highs on June 8, 9, 10, and 11 were all in this $531-$532 area. So RUT is paused right at resistance. The SPX closed at $957, just above resistance at $950. Today's SPX candlestick was the classic doji, suggesting indecision or a relative standoff between the bulls and the bears.

I decided to add one more contract to my iron butterfly today: one contract of the $530/$580 calls at $14.00 and one contract of the $450/$500 puts at $5.50. This position now stands at a P/L of -$716, delta = -$79, and theta = +$103. My adding the 530/580 calls betrays my expectation that we will either trade sideways at this resistance level or pull back from it. But I still have a reasonable positive theta and a breakeven up at $544, so I have given myself room to be wrong.

My August iron condor position remains pretty much unchanged at a P/L of -$950, delta = -$35, and theta = +$46. So, we patiently wait.

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The markets gapped up at the open and ran up, but then gave back all of those gains and appeared to be meandering sideways most of the day. The major indexes are flirting with the resistance levels set back in June (about $950 on SPX and $535 on RUT). By mid-day, I was thinking it may be time to sell the long September calls that are protecting my condor's call spreads; the thought was to take that profit today and wait for the RUT to drop tomorrow and then my condor would be back in good shape. But during the last hour of trading today, the RUT and SPX both started strengthening and even more so after 4 pm ET. That tells me some big money is expecting the market to push through these resistance levels. RUT closed at $526.96, just below resistance, and SPX closed at $951.13, right at resistance.

I decided it was better to leave my upside protection in place. The risk/reward curves for the next day or two are essentially flat with my Sept calls in place, i.e., I can afford to allow the RUT to continue upward to about $550 and my position P/L should remain contained to a loss of less than about $2000 (less than an average month's gain). The Aug condor stands at a P/L of -$880, delta = -$28 and theta = +$45. This is a weak theta position, although it is still positive. Clearly, this position is at the "fish or cut bait" stage - in the next few days, we will either close our call spreads or sell our Sept calls (or both).

My Aug iron butterfly now stands at a position delta of -$48 and theta = +$71. This theta/delta ratio is better, but nothing to write home about. To varying degrees, both of these positions are on the edge of being closed if this market continues its strong surge upward.

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The markets continue to teeter on the edge; the SPX and RUT both appeared to be pulling back from resistance levels set in early June, but reversed course mid-day and closed near where they opened, with minimal net change. My positions are hedged against further upside movement, so I am simply waiting for the market to decide whether it will break resistance and set new highs or pull back.

My iron butterfly stands at P/L of -$797, delta = -$47, and theta = +$75; my breakeven on the upside is $542, so I have some room for this position to be profitable and a reasonable positive theta while I wait for the market to choose a direction.

My Aug iron condor stands at a P/L = -$740, delta = -$37, and theta = +$37. This is a minimal theta/delta ratio of 1:1, but the long Sept $530 calls have me effectively hedged up to about RUT = $540, so I can patiently wait.

At this point, either the market breaks to the upside and I close my positions for minimized losses due to the adjustments, or the market pulls back and I have the opportunity for these positions to play out for a profit. The adjustments allow me to patiently wait rather than trying to predict the market and hope I am right.

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As I watched the market basically trade downward and sideways most of the morning, I was somewhat encouraged (because that favors my current positions). But, as the day wore on, the market struck me as holding up pretty well on increased volume. Thus, I re-evaluated my positions.

Around mid-day, my iron butterfly stood at a delta = -$69 and theta = +$72 - a pretty weak position. If RUT moves up only $1, I stand to lose all of the money I gain in one day from time decay. That's too much price risk, so I closed my two remaining $510 calls for $23.31 and sold two $530 calls for $12.51. By not rolling the long $560 calls upward, I reduced my upside profit potential but I also reduced my upside risk substantially. So the iron butterfly position now looks like this: one $520/$570 call spread, two $530/$560 call spreads, two $440/$490 put spreads and one $450/$500 put spread with a position delta of -$29 and theta = +$71. So I am back in my comfort zone of about a two to one theta/delta ratio.

My Aug iron condor is also hanging off the edge of the cliff, hedged by the long Sept $530 calls, but theta had deteriorated to low levels and I decided to make further adjustments rather than expose myself to any more risk. I closed 10 contracts of the $530/$540 calls for $4.10 and sold 10 contracts of the $570/$580 calls for $0.70, for a net $3.40 debit or $3,400. This boosted our theta back up to +$53 and reduced the position delta to -$14. At this point, my adjustments have greatly reduced my profit potential for this position, but I have also reduced my loss potential dramatically.

For those of you new to options spread trading, don't despair. You can start small, use simpler adjustments and build your experience over time. Understanding the various risk management techniques is crucial to successful options trading.