Trade The Journey

Trade The Journey

Pin Risk

Top of the Morning! I hope everyone is enjoying their weekend and preparing for the week ahead. This past week, I placed an Iron Condor options trade on United Airlines (UAL). I structured the trade to give UAL room to move with the (body) resistance and support levels being $36.35 and $34.64.

The week before last I placed my first Iron Condor with Las Vegas Sands (LVS) with a narrow body and luckily it ended up between the two price points. It was a rocky ride and I wasn’t sure how the trade would play out.

I find Iron Condors to be an excellent strategy because of the limited capital needed to place the trade. My max loss on this iron condor trade for UAL was $60 and the max profit was $195. For the Iron Condor to be profitable, UAL would have had to end up being between $36.35 and $34.45. The key to placing the Iron Condor trade is finding stocks that are in a sideways trend or aren’t too volatile.

After placing the trade, I watched UAL bounce between the two price points. However, towards the end of the week, it broke through the $36.35 resistance level, and for the rest of the week UAL used that level as a support level.  I was disappointed.

At the end of the week, I knew that UAL’s chances of returning between those two price points were slim but I still I didn’t close the trade. About an hour before the market close, I received a text message alert notifying me that the trade had been closed.

I looked closer at the message and saw that Robinhood had closed the trade due to “Pin Risk“. Due to the short call being near the money, and the rest of the options being totally worthless, I was at risk of having the short call be exercised. If the short call was exercised, I would be on the hook for supplying the one-hundred shares at the call price of $36.50 which would have totaled to a little less than $3,600.

I’d heard of pin risk but never had I experienced it. I was upset with Robinhood because when they closed the trade, I incurred the maximum loss. Robinhood didn’t wait to ensure that I received the best possible closing trade, they just closed the position. Without hesitation, I reached out to the Robinhood support team, and they told me that they close out trades an hour before the market close when the situation calls for immediate action.

My first mistake was placing an options trade with Robinhood. My second mistake was not being aware of all the risks facing an Iron Condor options trade.

These are the types of trading lessons you can’t receive from reading a book. This coming week I’ll be placing another Iron Condor options trade. The results and notes from the trade are below.

Economic Review

The services sector grew for the 25th consecutive month. All industries reported growth for the month of June. Although there is continued growth in services, the growth is slowing. New orders are growing slower as is the new export of orders. Supplier deliveries slowing and point to the fact that businesses are struggling to replenish inventories. Existing inventories are being used while businesses adjust to longer delivery times.  The longer delivery times and availability of materials are also leading to a growing backlog of orders. Prices are falling, with most prices the same or lower. Business activity/production is growing at a faster pace due to higher customer demand and “capacity online”. Filling positions continues to be a challenge for employers.

Commodities in short supply:

Appliances (4); Baby Formula (2); Contrast Media (2); Diesel Fuel (2); Electrical Components (3); Electronic Components (7); Garage Doors; Lab Supplies; Labor (11); Microchips (2); Needles and Syringes (6); Paper Products (4); Sugar; and Transformers (2).

The number in between the parentheses is the number of consecutive months the commodity has been in short supply. Below is a quote highlighting just how important the services sector is to economic growth.

“The past relationship between the Services PMI® and the overall economy indicates that the Services PMI® for June (55.3 percent) corresponds to a 1.9-percent increase in real gross domestic product (GDP) on an annualized basis.”

Factory New orders for manufactured goods rose 1.6% for the month of May. New orders for durable goods rose 0.8%, led by transportation equipment and nondurable goods rose 2.3%. Shipments rose 1.4% for durable goods and 2.3% for nondurable goods. Nondurable goods shipments’ rise was led by Petroleum and coal products and Durable goods shipments were led by transportation equipment. Petroleum refineries which also posted a large rise in shipments are included in the category of Petroleum and coal products. Unfilled orders increased by 0.4%.

Inventories for durable goods rose 0.6% led by Machinery, and inventories for nondurable goods rose 2.3% led by Petroleum and coal products. Capital nondefense capital goods posted a slight increase for the month of May. Each stage of fabrication which includes materials and supplies, work in process and finished goods rose in May. The ratio of manufacturer’s inventories to shipments and unfilled orders remains at the 1.47 level from the last few months.

The number of job openings decreased slightly for May. Hires, separations, quits, layoffs and discharges were little changed from the previous month. The largest decrease in job openings was in professional and business services, and durable and nondurable goods manufacturing. The highest rise in employment was in professional and business services, leisure and hospitality, and health care. Quits increased in arts, entertainment, and recreation. Overall, the amount of hiring is still outpacing the separations which mean the labor market is still strong.

Employment rose by 372,000 in June and the unemployment rate remains at 3.6%. Most of the measures for employment and unemployment remained about the same from the previous month. Telework decreased by 0.3% for June. Average hourly earnings increased by 0.3% and the average workweek remained at 34.5 hours. Manufacturing was little changed in workweek hours but fell in overtime hours indicating the level of production is moderating.

Mortgage applications were down for the week as was the refinance index. The mortgage rate for a fixed 30-yea mortgage fell for a second consecutive week. Rates are falling alongside treasuries as the fear of a potential recession grows. Although last week bonds prices fell across maturities causing yields to rise.  The curve remains inverted. The purchase index rose for the week.

The fed signaled through the release of its June meeting minutes that a 50 or 75 basis point rate increase is on the table for the July meeting. The minutes revealed that the Fed is worried about higher prices becoming entrenched and is committed to restoring price stability at the risk of economic slowdown. If the next GDP report registers a negative growth rate, that will signal the beginning of a recession. Now the Fed is shooting for a fed funds rate of 3.4%. How the rate hikes play out is anyone’s guess?

The question on the market’s mind is will the Fed tighten to the point of causing a major economic slowdown and have to reverse its policy of easing. Although some are anxious to call a market bottom, it seems too early to tell how things will play out. China is still battling Covid, and the Ukraine-Russia conflict continues.

As evidenced by the economic data reports, the rate hikes are already having an impact on the economy and markets. Businesses are slowing their borrowing and consumer sales are slowing in some cases. Market volatility remains high although the VIX did fall for the week. Across the indices, prices moved toward their 50 SMAs’ with the Nasdaq almost breaking through.

For a market turnaround, I’d pay attention to the Russell 2000 which will indicate whether market participants are interested in resuming taking on risks. This could be the beginning of a sideways trend as markets attempt to decipher how things will play out.

This past week in Review:

This past week, I did an okay job of managing my expenses. As I prepare for a new job and salary, I want to lower the number of expenses I make monthly. Too much money slips through my hands through memberships and discretionary spending. My goal moving forward is to save close to 35% of my income. Now I save close to 25%.

To reach my goal of saving 30% of my income I’ll have to sit down and form a budget the old-fashioned way by writing it down. I’ve yet to do so.

Grade: D+

Reason: I haven’t formed a budget yet.

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