Options Trade #22 - SPX Iron Condor

Updated: Jan 15, 2019

VTS Community,

* New VTS Discretionary Options trade today *

Successful options trading really comes down to having a full toolbox of potential trade types that we know and understand, and then using the right tool for the job.  That is to say, matching the correct options trade type with the current market environment.  So what environment are we in now?  

Last week saw some extreme levels of selling in the broad markets that did flag among historical rankings.  As I said last week, sigma is often used in the context of a measure of the standard deviation move in relation to historical volatility levels.  The gap down last week was an 8 sigma move, only seen four other times in history.  It was also the 11th largest VIX spike in history, so it was definitely something that rocked the markets.  We were in safety positions in our strategies ahead of time so no harm was done at all  (and in fact we made a little money)  but we have to recognize that at least in the near-term, we are now in an elevated volatility environment.

Remember, Iron Condors are vega negative trades which means that they benefit from a declining volatility environment.  It's not a good idea to open them when volatility is already low because that opens the trader up to taking losses if that changes.  However, when volatility is elevated they work much better because if things stay volatile we are already in a higher premium trade, and if things settle down afterward we benefit from being vega negative.  Also if you enter trades with higher volatility you can stretch the wings of the condor out a little wider and cover a nice area of future potential movements.

S&P 500 (SPX) with our short strikes drawn  (white lines):

You can see with this trade we are able to get our short strikes well above all-time highs and well below the lows from earlier in the year.  We definitely won't wait until it reaches either of those before closing it, but it's a good entry point for a trade.

The Trade:Iron Condor on SPX

Buy to Open 3 x 21 Dec 18' SPX 2450 Put Sell to Open 3 x 21 Dec 18' SPX 2475 Put Sell to Open 3 x 21 Dec 18' SPX 3025 Call Buy to Open 3 x 21 Dec 18' SPX 3050 Call Credit:  ~ 2.70 Days to expiry:  66

* prices move around, so just get the highest premium you can

Margin Requirement: 1 option contract  =  100 shares The margin requirement is the strike gap minus the premium (25.00  -  2.70)  *  100  =  2,230 per contract 3 contracts  *  2,230  =  6,690 margin requirement

The VTS Discretionary Options model portfolio is at 26,061.38 6,690 margin is 25.67% of the portfolio

* You can scale your trade to roughly 25% of your VTS Discretionary Options funds

Stop-loss: I don't use hard stop-losses for Iron Condors.  Instead, I have developed a proprietary method of measuring the risk-reward profile day to day and determining if it's still advantageous to remain in the trade or close it.

However as a rough estimate, we typically stop-loss out of trades at 1.3 - 1.6 x the premium collected.  

So if the 2.70 premium we collect for the trade rises to about 4.05 we will consider closing it for a loss.

Today's SPX Iron Condor

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