This iron condor trading idea and structure come from trader Fauzia at Dough.
My normal practice centers the iron condor on the present price. Her trade sets the high end of the profit zone near the current price, and the low end below it. Fauzia made no comment on her trade, but clearly the structure anticipates a trading zone stretching $100 below today's level. a decline in the S&P 500.
And that's a reasonable expectation. The Trump bump in the markets has brought SPX up from 2084 to 2214. Fauzia's trade presumes a pullback that remains above resistance.
The high delta at the upper boundary increases the chance that the position will fail if the price rises, and yet also increases the credit I get for the trade. It's the classic risk/reward ratio embodied in the folk wisdom, "Risk is the mother of profit." This position is a big shout-out to Mom.
Like Fauzia, I shall use the JAN series of options, which trades for the last time 50 days hence, on Jan. 20.
Implied volatility stands at 14%, which stands in the 15th percentile of its annual range. The price used for analysis was $2,203.62.
short the $2,100 puts and long the $2,080 puts,
sold for a credit and expiring Jan. 21.
Probability of expiring out-of-the-money
| JAN | Strike | OTM | Δ |
|---|---|---|---|
| Upper | 2200 | 48.3% | 53 |
| Lower | 2100 | 79.5% | 19 |
The premium is $13.80, which is 69% of the width of the position’s wings.
The risk/reward ratio is 0.45:1.
Decision for My Account
I have entered a position on SPX as described above. The stock at the time of entry was priced at $2,202.77.
-- Tim Bovee, Portland, Oregon, Nov. 30, 2016
by Spencer Jakab |
References
Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.
Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
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Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.License
All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
Based on a work at www.timbovee.com.
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