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Quant Trader
Expert-Level Options for Sophisticated Traders

January 4, 2023

Cabot Options Institute Quant Trader – Alert (IWM)

Happy 2023, everyone!

Let’s hope our good fortune in 2022 quickly carries over into 2023.

Today I’m going to open a conservative iron condor in IWM going out to the February expiration cycle (44 days until expiration). We need to start ramping up our premium for February, so I plan on starting with an iron condor and hopefully adding a bear call and bull put spread to the mix over the coming days.

Admittedly, IV ranks across the board are on the low side. IWM is currently 18.2; my preference is to see an IV rank above 30. As a result of the current rankings, we need to tread lightly here. Typically, the transitions from a low volatility environment to a high volatility environment, or vice versa, is the kryptonite for spread-based strategies. But again, we know losses will come – that’s a guarantee, right? It’s how we handle them, mostly through proper position size and disciplined stop-losses, that allows us to be profitable over the long-term and that’s what really matters.

We currently have a January IWM iron condor in profitable territory that is due to expire in 14 days, but I intend to hold on a bit longer due to the heightened probabilities on the trade. A max winner would lead to a 21.2% return. Of course, probabilities can change quickly. If so, I’ll swiftly close the trade for a nice profit.

iShares Russell 2000 ETF (IWM)

With the Russell 2000 ETF (IWM) trading for 176.13, I want to place a short-term iron condor going out 44 days. My intent is to take off the trade well before the February 17, 2023, expiration date.

IV: 26.33%
IV Rank: 18.2
Expected Move (Range): The expected move (range) for the February 17, 2023 expiration cycle is from 164 to 189.

Call Side:

COI_QT_IWM_ironcondor_call.png

Put Side:

COI_QT_IWM_ironcondor_put.png

The Trade

Simultaneously:

  • Sell to Open IWM February 17, 2023, 195 call strike
  • Buy to Open IWM February 17, 2023, 200 call strike
  • Sell to Open IWM February 17, 2023, 154 put strike
  • Buy to Open IWM February 17, 2023, 149 put strike…for a total of $0.65. (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 roughly 10.7% to the upside and more than 12.6% to the downside over the next 44 days.
Delta of spread: -0.02
Probability of Profit: 90.29% (upside) – 90.37% (downside)
Probability of Touch: 19.44% (call side) – 19.06% (put side)
Total net credit: $0.65
Total risk per spread: $4.35
Max return: 14.9%

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 200/195 – 154/149 iron condor for roughly $0.65, if my iron condor reaches $1.30 to $1.95, 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.