After closing out our SPY bear call spread (albeit prematurely) for a decent profit yesterday, I want to continue to take advantage of the inflated volatility that resides in the S&P 500 by adding another iron condor to the portfolio.
The S&P 500 ETF (SPY) is currently trading for 375.87.
As you can see below, the IV rank is well above normal at 79.76 and I have no problem selling premium any time we see an IV rank above 40.
IV: 26.84%
IV Rank: 79.76
Expected Move (Range): The expected move (range) for the August 19, 2022, expiration cycle is from 352 to 399.
The Trade
Call Side:
Put Side:
With the S&P 500 (SPY) trading for 375.87 I want to place a short-term iron condor going out 36 days. My intent is to take off the trade well before the August 19, 2022, expiration date.
Simultaneously:
- Sell to Open SPY August 19, 2022, 412 call strike
Buy to Open SPY August 19, 2022, 417 call strike - Sell to Open SPY August 19, 2022, 335 put strike
Buy to Open SPY August 19, 2022, 330 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: 93.08% (upside) – 87.66% (downside)
Probability of Touch: 14.05% (call side) – 24.09% (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 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 SPY 412/417 – 335/330 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.