April 26, 2022

Oversold Does Not Mean Over

You can pull up just about any indicator on a chart and it will show the broader market is oversold.  Someone once told me that “oversold does not mean over,” meaning, that just because a trend may be oversold doesn’t mean it’s going to turn around on a dime.  There are several instances where a stock can have an oversold RSI or Stochastic indicator and remain that way for some time.  


Traders seem content with throwing in the towel, and why not, it’s brutal out there.  Even the more defensive sectors like Consumer Defensive, Real Estate, and Consumer Cylicals are all taking a gut punch.  At one point on Monday, the SP500 was down another 1%, adding to the over 2.5% from Friday.  That’s a pretty big move in one direction over a couple of days.  Luckily we had a last-hour rally.  Will that continue?


And just because you may be tired of the pandemic or maybe you believe the news about the pandemic is “oversold,” does not mean that the pandemic is over?  Over the weekend China ramped up pandemic restrictions to contain a worsening Covid outbreak.  That is causing concern that the global economy will slow.  As a result, the high-flying energy stocks fell off their highs with the expectation that market demand will soften if lockdowns continue.


Likewise, I thought the Michigan winter season was over.  It seemed a bit oversold when I was watching the snow come down in April.  I thought we hit a pivot point when we had a 79-degree day over the weekend and sure enough, it’s in the 40s today, I have a bad cold now and am heavily medicated trying to write a newsletter that makes sense.  I guess we had a bear temperature rally over the weekend because temps are falling as fast as the market.


Oversold does not mean over.  


Will tech stocks’ earnings be the catalyst we need for a reversal this week?  


Today I decided to run another scan. Those who have been reading my issues of Filthy Rich, Dirt Poor know I love running all types of scans to try to see what is really happening in the market.  


Today I ran a simple scan:

Country: USA

Performance: Today is up

Beta: <1

Relative Volume: > 1


I just wanted to see what stocks were trading above their average volume, trading higher today, and have a low beta, aka volatility compared with the overall market.


I wasn’t looking specifically for stocks, but what sector and/or industry was at the top of the scan (sorted by stock performance change for the day).  Based on this it looks like the Healthcare sector had some strong upside moves.  


Prices as of 1:36p on 4/25/22

So that brings me to the ticker, XLV – The Healthcare SPDR ETF. The chart below shows that it’s currently trading near its 200-day simple moving average. The sector has been hit over the last 3 days, but a close above $133 or so could mean a rebound for the sector, especially with a number of stocks in that sector being at the top of the daily percent gain scanner from above.


Per the sector performance charts below, it’s been a rough go lately.  As mentioned in the main article above, Energy was hit hard by renewed fears of covid shutdowns.  Broad-based selling continued throughout the rest of the market on fears/acknowledgment of an estimated 0.50 hike in interest rates that will be reported in May.  

performance chart


Today we’re going to talk about iron condor repairs.  This came in from a user submission last week.  For those who are new to iron condors, an iron condor is when you simultaneously place a call spread and a put spread.  It creates a top hat pattern, that looks like this… 

iron condor repairs

The current price of the stock is $153 dollars and we’ve put on a credit call spread and a credit put spread.  Here’s the situation:

Current Date: 3/14/22

Current Price: $153.65

Sold to open May 20 $175 call

Buy to open May 20 $180 call

Sold to open May 20 $130 put

Buy top open May 20 125 put

Option strikes picked based on closest to a .20 delta


Our net credit is $1.41, which means the margin requirement is going to be $359 ($5 wide strikes – $1.41 credit).  We will be profitable as long as the stock stays between our breakeven prices of $128.56 and $176.39.  This is a delta-neutral strategy because as long as the stock stays within the range you select by your strikes, you will make money.  


One way people trade iron condors is by selecting the strike prices just outside of a 1 standard deviation move.  That just means selecting strike prices where the stock has a 68% probability of staying between.  You win on this trade with time decay.  The price of the stock can move in either direction, but as long as it stays within your range, the price of the iron condor will go down each day, meaning you can buy it back for less than the initial credit you received.


Sometimes iron condors get challenged.  This happens when the stock price marches up or down to either one of your strike prices.  


How can you defend an iron condor when a price gets near your strike?  It’s always good if you have time on your side.  The less time you have, the fewer your options to repair the trade.


Following our example stock, here’s what the chart was like on 3/25, two weeks after we open the position:

iron condor repairs

The current price (CP) was $173, a 12.5% move in two weeks, and now we’re very close to our sold strike at $175.

You can ladder in and add another iron condor position, assuming you are not trading more than 5% of your total account value in this position (my personal rule). I went out to the April 8th strikes and once again selected short strikes under a .20 delta and bought strikes to have a $5 width.

Sell to open Apr 8 $182.5 call Buy to open Apr 8 $187.5 call Sell to open Apr 8 $165 call Buy to open Apr 8 $160 call

This new position brought in a net credit of $0.93. The margin required to place the trade was an additional $407. What you’ve now done is add $0.93 to your break-even. Your new breakeven is $177.32 instead of $176.39.

If needed, you can keep adding ladders to your iron condor position each week to give it breathing room, but just be careful you’re not collecting pennies in front of a steam roller.

iron condor repairs

Another option is to roll the opposite end of the iron condor.  In our example, we were challenged on the upside.  When the price was at $173, the put strike that we sold went from a .20 delta to a .04 delta.  We could roll that side of the iron condor so that it’s back at a .20 delta and you’d get a credit for that trade.  Just be careful that you don’t adjust that side too aggressively so that if the stock price does come down you’re not in trouble on that side now. 

The third choice for our example would be to sell a call credit spread.  We’ve already seen our .20 delta move up to a delta of .50, which some argue is an extreme move, so we could theorize that the stock will now come down and revert to its average.  Maybe the stock jumped up too far, too fast.  By adding a call spread, let’s say at a .20 delta strike price, you will get credit upfront and if the stock does go back down, your new hedge will become profitable.  

You can also take any one of these ideas and use a different number of contracts in your repair.  You may need a ratio of 2:1 for repair contracts to original position contracts.  

Repairing trades is a good plan, but have a couple of things in mind before you do your repairs:

  1. What was my original acceptance level for max loss?

  2. Will my repairs add more risk and put me over my acceptable loss?

  3. Am I repairing the position for emotional reasons?  Sometimes it’s best to cut your losses and move on.  I’ve certainly tried to over-repair a trade or two.

  4. What is the maximum amount of money (margin or otherwise) that I can spend on this trade (again, my personal rule is no more than 5% on any one position, including repairs)

Does that give you some ideas on how to repair iron condors?  Do you agree or have a different approach?  Let us know!


If you have any questions, comments, or anything we can help with, reach us at any time.




Editor, Wealthy Investor Society


Receive the latest news

Subscribe To Our Daily Newsletter

Get notified about new articles, special events, training, and much more

Send Filthy Rich Dirt Poor

To Your Inbox

Like What You See?

Leave your info below to get more options and trading ideas to your inbox

Yes, send me news to my inbox.