We’ve had a good start, with the Quant Trader service outperforming the market by a significant margin. Risk management has been a huge part of our success, mostly by locking in profits when we can lock in 50% to 75% of the original premium sold.

As a result, I decided on Friday (per the trade alert) to set a hard stop-loss for our IWM iron condor at $2.00. This will allow us to take all risk off the table and maintain overall profits in the portfolio, which speaks to the power of our approach as it has been a challenging environment for most investment strategies. Hopefully, the oversold state of IWM will lead to a push higher, giving us the ability to take a potential profit, but if not, we want to be fully prepared by taking off our trade, maintaining overall profits and patiently waiting for more opportunities to arise.

Cabot Options Institute – Quant Trader Issue: September 26, 2022

We’ve had a good start, with the Quant Trader service outperforming the market by a significant margin. Risk management has been a huge part of our success, mostly by locking in profits when we can lock in 50% to 75% of the original premium sold.

As a result, I decided on Friday (per the trade alert) to set a hard stop-loss for our IWM iron condor at $2.00. This will allow us to take all risk off the table and maintain overall profits in the portfolio, which speaks to the power of our approach as it has been a challenging environment for most investment strategies. Hopefully, the oversold state of IWM will lead to a push higher, giving us the ability to take a potential profit, but if not, we want to be fully prepared by taking off our trade, maintaining overall profits and patiently waiting for more opportunities to arise. To be clear, I will not set a hard stop-loss in my platform; rather, I will set a mental stop at $2.00 and take the iron condor off when the price of our IWM iron condor reaches those levels.

I also want to establish a few additional positions this week, but I’m going to go with some higher-than-normal probability trades, roughly in the 90% range. Implied volatility is high across the board at the moment which means we will not have to sacrifice too much in the way of premium while still maintaining the opportunity to make some decent returns. As has been the case recently, I will remain nimble with any established trades as now is not the time (if ever, for that matter) to hold on and hope for the best, trying to eke out a few additional pennies. We will continue to take profits when it makes sense (locking in 50% to 75% of the original premium sold) and begin the process of looking for additional opportunities.

Current Portfolio

Volatility Talk
The VIX finally broke above the 22-28 range with an intraday high of 32 before falling back below 30. This week will be very telling. Typically, when we see short-term oversold readings across the board and a VIX that conversely is in a short-term overbought state a push higher is right around the corner. As for how sustainable that pop is is anyone’s guess, so as I stated above, we will need to stay nimble.

If we do see a pop over the next few trading sessions, I will look to add a bear call spread to the mix to balance out our deltas a bit as our IWM iron condor is essentially a bullish position at the moment. We need to lower our deltas and the only way to do that is to add some bearish exposure by the way of a bear call spread or two. Obviously the hope is a pop will occur which will give our IWM iron condor some breathing room and allow us to sell some bear call spreads at higher prices, but if IWM hits our our stop-loss of $2.00, we will simply get out of the trade and start anew for the November expiration cycle.

Weekly High-Probability Mean Reversion Indicator
Below is my watch list of ETFs and stocks with the most liquid options headed into the week of September 25, 2022.

Here are the various levels I use to determine if an ETF is in an oversold or overbought state.

Each week I also include the current implied volatility (IV) and IV Rank. I look for an IV rank above 40, preferably higher.

ETF Watch List – Trade Ideas

Stock Watch List – Trade Ideas

Weekly Trade Discussion: Open Positions

*Portfolio updated every Monday

Iron Condor: IWM October 21, 2022, 203/208 calls – 163/158 puts
Original trade published on 9-13-2022 (click to see original alert)

Background: At the time of the trade, IWM was trading for 183.51. We sold the October 21, 2022, IWM 203/208 – 163/158 iron condor for $0.77 with a 90.93% (upside) and 85.20% (downside) probability of success. The expected range was 171 to 196.

Current Thoughts: IWM is currently trading for 167.31 and our iron condor is worth $0.81. Our probability of success stands at 99.08% on the call side and 57.30% on the put side.

With 26 days left and IWM testing our short put strike of 163, there is a good chance we will hit the stop-loss that I established with my alert that went our last Friday. Our iron condor currently stands at $1.53, but a continuation of the current trend lower will certainly trigger my mental stop-loss of $2.00 and convince me to take off the trade for a small loss. As I stated in the alert on Friday, we have managed to outperform all indices by a nice margin and I want to keep it that way by not allowing losses to get out of hand. Remember, losses will occur; it’s how we manage them over the long-term that separates success from failure. It’s that simple. We’re not going to take 100% losses, and, in most cases, we will never even get close to that percentage.

Call Side:

Put Side:

The next Cabot Options Institute – Quant Trader issue will be published on October 3, 2022.

About the Analyst

Andy Crowder

Andy Crowder is a professional options trader, researcher and Chief Analyst of Cabot Options Institute. Formerly with Oppenheimer & Co. in New York, Andy has leveraged his investment experience to develop his statistically based options trading strategy which applies probability theory to option valuations in order to execute risk-controlled trades. This proprietary strategy has been refined through two decades of research and real-world experience and has been featured in the Wall Street Journal, Seeking Alpha, and numerous other financial publications. Andy has helped thousands of option traders learn and implement his meticulous rules-driven options trading strategies through highly attended conferences, one-on-one coaching, webinars, and his work as a financial columnist. He currently resides in Bolton Valley, Vermont and when he’s not trading, teaching and writing about options, he enjoys spending time with his wife and two daughters, backcountry skiing, biking, running and enjoying all things outdoors.