With the overall market in an extreme, short-term overbought state after rallying almost 12% in just 27 days, I’ve decided to place a bear call spread in DIA. We already have a bear call in SPY and I want to add another in DIA today for the September expiration cycle. I also want to place an iron condor today and my hope is to add a bull put spread or two over the next few days to fully balance out our deltas.
SPDR Dow Jones Industrials (DIA)
With the DIA trading for 335.06 I want to place a short-term bear call spread going out 43 days. My intent is to take off the trade well before the September 23, 2022, expiration date.
IV: 18.25%
IV Rank: 12.0
Expected Move (Range): The expected move (range) for the September 23, 2022, expiration cycle is from 321 to 349.
The Trade
Simultaneously:
Sell to Open DIA September 23, 2022, 350 call strike
Buy to Open DIA September 23, 2022, 355 call strike for a total of $0.75 (As always, the price of spread will vary, so please adjust accordingly.)
Delta of spread: 0.08
Probability of Profit: 82.67%
Probability of Touch: 34.22%
Total net credit: $0.75
Total risk per spread: $4.25
Max return: 17.6%
Risk Management
Since we know how much we stand to make and lose prior to order entry, we can precisely define our position size on every trade we place. Position size is the most important factor when managing risk, so keeping each trade at a reasonable level (I use 1% to 5% per trade) allows not only the Law of Large Numbers to work in your favor … it also allows you to sleep well at night.
I tend to set a stop-loss that sits 1 to 2 times my original credit. Since I’m selling the 350/355 bear call spread for roughly $0.75, if my bear call spread reaches $1.50 to $2.25 I will exit the trade. As always, I will keep you updated on the status of the position as it progresses and send any necessary updates as needed.
iShares Russell 2000 ETF (IWM)
With the Russell 2000 ETF (IWM) trading for 197.66, I want to place a short-term iron condor going out 43 days. My intent is to take off the trade well before the September 23, 2022, expiration date.
IV: 26.62%
IV Rank: 33.9
Expected Move (Range): The expected move (range) for the September 23, 2022, expiration cycle is from 186 to 209.
Call Side:
Put Side:
The Trade
Simultaneously:
- Sell to Open IWM September 23, 2022, 215 call strike
Buy to Open IWM September 23, 2022, 220 call strike - Sell to Open IWM September 23, 2022, 173 put strike
Buy to Open IWM September 23, 2022, 168 put strike
…for a total of $0.77 (As always, the price of the spread can vary from the time of the alert, so please adjust accordingly if you wish to take on a position).
Delta of spread: -0.02
Probability of Profit: 88.09% (upside) – 88.06% (downside)
Probability of Touch: 24.01% (call side) – 23.41% (put side)
Total net credit: $0.77
Total risk per spread: $4.23
Max return: 18.2%
Risk Management
Since we know how much we stand to make and lose prior to order entry we can precisely define our position size on every trade we place. Position size is the most important factor when managing risk, so keeping each trade at a reasonable level (I use 1% to 5% per trade) allows not only the Law of Large Numbers to work in your favor … it also allows you to sleep well at night.
I tend to set a stop-loss that sits 1 to 2 times my original credit. Since I’m selling the 220/215 – 173/168 iron condor for roughly $0.77, if my iron condor reaches $1.54 to $2.31, I will exit the trade. As always, I will keep you updated on the status of the position as it progresses and send any necessary updates as needed.
If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.