We’ve been sitting on the sidelines for about a week, staying fairly cautious, while the market continues to vacillate wildly.
We currently have one trade open, a SPY bear call spread at the 405/410 call strikes due to expire in 29 days. The trade currently sits with a probability of success over 89%, so we feel good about this one at the moment.
But it’s time to get back on the dancefloor.
There is no doubt we’ve seen historic volatility in 2022. Just in the past month we’ve seen the S&P 500 advance/decline by more than 5%, on four different occasions. To put it into perspective, we haven’t seen similar volatility over that same time frame since 1928. So to no one’s surprise, implied volatility remains high across the board.
As a result, I’m going to take advantage of the ongoing inflated levels of options premium. So today, I’ve decided to dip my toes back into the market with a fairly conservative, high-probability iron condor.
The Russell 2000 ETF (IWM) is currently trading for 169.27.
As you can see below, IV rank is well above normal and I have no problem selling premium any time we see an IV rank above 40. So, when the IV rank is sitting at 79.68 there is no doubt options premium is inflated and it’s a good time to sell some premium.
IV: 33.24%
IV Rank: 79.68
Expected Move (Range):
The expected move (range) for the August 19, 2022, expiration cycle is from 156 to 186.
The Trade
Call Side:
Put Side:
With the Russell 2000 (IWM) trading for 169.27 I want to place a short-term iron condor going out 50 days. My intent is to take off the trade well before the August 19, 2022, expiration date.
Simultaneously:
- Sell to Open IWM August 19, 2022, 195 call strike
Buy to Open IWM August 19, 2022, 200 call strike - Sell to Open IWM August 19, 2022, 145 put strike
Buy to Open IWM August 19, 2022, 140 put strike
…for a total of $0.70 (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: 0.00
Probability of Profit: 93.67% (upside) – 84.24% (downside)
Probability of Touch: 12.90% (call side) – 30.45% (put side)
Total net credit: $0.70
Total risk per spread: $4.30
Max return: 16.3%
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 by keeping each trade at a reasonable level (I use 1% to 5% per trade) it 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 195/200 – 145/140 iron condor for roughly $0.70, if my iron condor reaches $1.40 to $2.10, 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.