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Quant Trader
Expert-Level Options for Sophisticated Traders

December 7, 2022

Cabot Options Institute Quant Trader – Alert (IWM)

After taking off our bear call spreads yesterday, it’s time to get back into the thick of things and sell some more premium for the January expiration cycle.

Also, just as a reminder, remain disciplined with your position sizing. As I always state, think of yourself as a risk manager first, trader/investor second. Losing trades will come, that’s a guarantee. But we also must understand, probabilities will continue to lead the way. So, while we expect to see a high win ratio in Quant Trader due to an inherently high-probability approach, we also need to understand that losses are also a part of the process and it’s how we handle those challenges that truly dictates our long-term success.

iShares Russell 2000 ETF (IWM)

With the Russell 2000 ETF (IWM) trading for 180.49, I want to place a short-term iron condor going out 44 days. My intent is to take off the trade well before the January 20, 2023, expiration date.

IV: 27.3%
IV Rank: 17.3
Expected Move (Range): The expected move (range) for the January 20, 2023, expiration cycle is from 168 to 193.

Call Side:

COI_QT_120722_IWM_bearcall.png

Put Side:

COI_QT_120722_IWM_bullput.png

The Trade

Simultaneously:

  • Sell to Open IWM January 20, 2023, 198 call strike
  • Buy to Open IWM January 20, 2023, 202 call strike
  • Sell to Open IWM January 20, 2023, 160 put strike
  • Buy to Open IWM January 20, 2023, 156 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.)

*Our margin of error is 9.7% to the upside and more than 11.4% to the downside over the next 44 days.

Delta of spread: -0.02
Probability of Profit: 88.84% (upside) – 86.84% (downside)
Probability of Touch: 22.42% (call side) – 25.92% (put side)
Total net credit: $0.70
Total risk per spread: $3.30
Max return: 21.2%

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 202/198 – 160/156 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.

If you have any questions, please do not hesitate to email me at andy@cabotwealth.com.

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.