It’s been a rocky start to Q2 2020, and by the looks of it… this type of price action isn’t going anywhere any time soon. So if you haven’t adapted to this market environment yet, I think now’s the best time to do so.
That being said, I’m an educator at heart — so I wanted to show you one way I’m looking to take advantage of the opportunities in this crazy market.
For the most part, I’ve stuck with a specific type of spread trade — which works extremely well when volatility pulls back or drops significantly. However, I’ve seen some traders make a killing — like my former student Kyle Dennis, who made $477K in trading profits last month!
Of course, that gave me some inspiration and I thought to myself, “Wow, there’s a lot of opportunity out there… maybe I should start doing some more research and tweak some of my bread-and-butter setups.”
The other day, I came up with a new addition to my Weekly Windfalls trading system — one that I believe will help me generate more alpha at these levels.
[Revealed] How I’m Attacking This Market
If you don’t already know, I trade options spreads. More specifically, I trade credit spreads. What that means is I collect premium and I benefit from drops in implied volatility and time decay. Not only that, but I don’t necessarily need the underlying stock to move in my favor.
Now, with options trading, you can get super creative, so I looked for similar strategies out there. Then I had my aha moment. With volatility so high, options are susceptible to massive drops, and one strategy that benefits from that is the “iron condor”.
Don’t get scared off by that term, because it’s actually really simple.
How Iron Condors Work
Iron condors are simply a combination of a put credit spread and a call credit spread.
Basically, you collect a premium for setting up the trade, and that’s the maximum profit you can expect on the trade.
Here’s a look at the payoff diagram (PnL chart) for an iron condor.
The teal line represents the PnL on the expiration date, depending on where the stock closes. As you can see, with this strategy, your maximum loss is defined. Basically, with this strategy, a big move in the underlying stock will hurt it, as well as rises in implied volatility.
The max loss is equivalent to the strike price of the long call less the strike price of the short call less the net premium received (and any commissions paid).
In this environment, I believe it’s imperative that you know when you would be at your maximum loss. For the iron condor, this occurs when the price of the underlying stock is greater than the strike price of the long call… or if the price of the underlying stock is less than the strike price of the long put.
Setting Up The Iron Condor
Here are some quick notes about the iron condor:
Remember, this strategy isn’t super complex. It’s basically a call and put vertical with the same expiration date. If you need a refresher on spread trades, grab the Wall St. Bookie absolutely free.
If I place this trade, I only look for about 33% of the premium during order entry. For example, let’s say I want to go $5 wide on each side, I would try to collect $1.70 total for both legs. Maybe one leg is $1, the other is $.70 = $1.70.
Moving along, when I’m looking to place the trade, anywhere between 4 – 6 weeks out is the desired time frame for expiration date.
Here’s an example of how an iron condor trade looks.
The red box is the vertical call that’s $5 wide (there’s $5 in between the strike prices), while the green box is the vertical put spread that’s also $5 wide. In the options market, you won’t always get the price you want.
For example, with this specific trade, the mid point is $1.975, but you may put an order for $1.95 to get filled, or mid-market or on the ask if price really matters.
So where will this trade be most profitable? Well as long as AAPL is between the 2 sold strikes $210 – $270, the trade wins.
Not only that, but time is on your side with this strategy. At the time, the theta (time decay) was about $.05 a day, but that value actually increases as days pass.
So even if the stock does nothing, you’d benefit from time decay. Moreover, if the implied volatility drops… then you would stand to profit.
Pretty simple, right?
If it’s not, re-read the notes I laid out, and I believe things will start clicking soon. Now, if you’re brand new to options, then I encourage you to watch this training lesson that shows you the power of my Weekly Windfalls system, and why spread trades are beneficial to my trading.