HIGH OCTANE 4 DAY SPX IRON CONDOR

The below trade was discussed earlier today in a webinar with Ally Invest.

B 1  JUL 6  2750 C, S 1  JUL 6  2745 C,  S 1  JUL 6  2660 P,  B 1  JUL 6  2655 P,   1.35 Credit. Margin or Risk per 1 contract is $365. I have an order in now for 1.35 credit at 12:27 pm central with SPX at 2704  -14. Not filled yet. Mid Price Range is between 1.25 and 1.35. My Profit Target is 15 % of my Max Risk of 365 and My Max Risk is 20% of $365. Would do smaller size than an 18 Day or 45 Day Iron Condor. There is more price Risk as you get closer to Duration and this trade expires this Friday in 4 Days! The beginning Greeks are :  Deltas  -.76,  Gamma  -.15,  Theta 24,  Vega  -18.

 

Dan Sheridan

dan@sheridanmentoring.com

Why should Covered Writes be Illegal?

Now that I have your attention, why the  dramatic  title?  Let’s start with a discussion of what covered writes  are , then lets get into a discussion on a better alternative.

Covered Write example: Buy 100 shares XYZ at $90 and sell 1 August 95 Call at $1.

Your generally buying stock and selling  an out-of-the money call against the long stock. Why would someone do this versus just buying the stock? Extra Income. As long as the stock doesn’t go up too much over a designated duration, you can make money on the stock appreciating and also some additional  income from the call your selling , as long as the stock doesn’t appreciate past the short strike. What’s the problem with this trade? Cost! In a retirement account, you would have to put up the full value of the stock minus the premium of the short call. In this case, you would pay $9000 for 100 shares of stock minus the  $100 premium from the short call, or $8900. What is a reasonable monthly yield on this type of strategy? About 1%. Is that bad? It’s not horrible, but for the risk and capital you have to put up, there are better alternatives. Like what? Long Diagonals! Example: Buy 1 Feb 2019  75 Call for $18 and sell 1 August 95 Call at $1. Why is this better? Cheaper and better Yield! Why cheaper? The cost is the long option minus the short option or $17 in this example. Why better Yield? Substituting an In-the-Money call instead of Long Stock requires a much cheaper capital outlay. The yield on the Long Diagonal in this example  is $100 premium divided by $1800 or 5.5%. Yields are usually 8-10% monthly on Long Diagonals,  this self made example gives you a visual of the Long Diagonal, but understates the potential yield. The yield on the stock is much lower because your dividing the premium by the full value of $100 shares of stock. For most of you, how would I recommend practically learning this strategy? If you are doing this strategy in a particular stock, start with 1 Long Diagonal in a stock you are already doing covered writes, and this will give you a feel for this strategy. When you start this strategy, what duration should I do and what strike should I sell?  Usually I do 30 day options. If neutral on the stock, I sell an ATM call, If Bearish , I sell an ITM Call. If Bullish , I sell an OTM call. What stocks should I do Long Diagonals in?  Stocks I am Bullish on over the next 6-12 months.

 

Dan Sheridan

dan@sheridanmentoring.com

Trade Idea for today

With the VIX at 17+ today the following trade that is “short” volatility looks interesting to me in the July 6th expiration-

 

SPX around 2705 to 2110

Buy a call butterfly with these strikes-

Buy 1 July 6th 2650 call

Sell 2 2700 calls

Buy 1 2740 call

 

I will try to execute trade for a debit around $18.00 per contract.

Will close trade if I am up or down 10% based on the cost of the trade.

 

Mark Fenton

mark@sheridanmentoring.com

Why VIX is soaring? ATR is the Culprit!

This week, the SPX has been between 2700 and 2723 if you just look at the closing prices of SPX this week and today. Big Deal?  No.  Twenty three  point range in a $2700 vehicle over the last 4 days? No big deal. Let’s look closer.  Monday and Wednesday had huge intra-day  price ranges, that’s a big deal if you have positions on. Monday had a 44 point range intra-day from 2698 to  2742   and closed at 2717. Wednesday this week had a range of 2699 to 2746 and closed at about 2700. When you see intra day ranges between 45-55, that’s huge. Those are the types of ranges you saw at the beginning of the correction in early February. That makes trading short term trades very difficult, especially if the IV is rising. With the VIX at about 18.39 as I  speak,  I am a little more comfortable with putting on short term , short Vega strategies like Butterflies and Iron Condors  , even with intra-day ranges exploding, why? Because I am now getting some compensation for the volatility in terms of farther ranges in my Iron Condors and cheaper prices and wider Break even points in my Butterflies. When you look at volatility as measured by the difference between the high and low every day instead of just looking at the closing price,  that is called Average True Range. That is a more accurate Volatility metric because it calculates the true volatility of a vehicle. It is more relevant to an options trader because we have trading plans and react to different price levels, not just the closing price.

Dan Sheridan

dan@sheridanmentoring.com

Live Trade: SPX 11 Day Butterfly

SPX  2770.59 at 12:15 central.  Jun  29  Expiration.  11 Day Unbalanced Butterfly

B 1   2740 C,  S 2  2770 C,  B 1  2795 C    9.65 Debit. Margin/Risk $965

Beginning Greeks:  Price  2770     Deltas  -1.38   Theta  19    Vega  -58

Profit target and Max Loss:  8 % Profit and 10% Max Loss of Margin/Risk of $965.

Will keep it simple and use no adjustments.

Mid Price now is 9.65 and not filled yet but still keeping my bid at 9.65 Debit.

Live AAPL Butterfly Trade

B 1  Jun 1  182.5 Call,  S 2  Jun 1  187.5 C,  B 1  Jun 1  192.5 C,  1.84 Debit.  Margin and Risk  $184.  11 Day Butterfly Trade. Filled at 12:09 PM CT, with AAPL at 188.

Profit Target : 20% or $35 for every 1 contract. Sell out Butterfly at $2.19 Credit. Max Loss is 20% or $35 for every 1 contract. If Butterfly price goes from 1.84 to $1.49, get out.

Why am I trying to get 20%?  Because 10% Profit target for every 1 contract would be only $18, and after commissions , there wouldn’t be much less. This is a very cheap dollar trade, only an outlay ( debit) of $184 for every 1 contract.

Dan Sheridan  dan@sheridanmentoring.com

Live Double Calendar in SPX

Double Calendar  B 1  Jun 8  2750 C,  B 1  Jun 8  2690 P, S 1  May 25  2750 C, S 1  May 25  2690 P  16.30 Debit

Profit target: Sell Spread at 17.45 credit for about 7% profit. Max Loss when Spread decreases under 14.80, loss of around 10%

Dan, covered the trade in more detail in the video below.

Iron Condor or Iron Butterfly, Which is better?

I am often asked as an option trading mentor, which is better, the iron condor or the iron butterfly. Both are short Vega trades meaning that they benefit from volatility lowering. However the structure is different and the pros and cons of each are different.

 

The iron condor, is perhaps the most popular option spread trade. The structure is selling a call vertical and a put vertical, out of the money, usually by several strikes. The benefit to the strategy is that it is short one volatility and also it has a wider range for the price to move around,  up or down, before you get into any trouble with the trade. It is a good trade in higher volatility markets because you paid more premium for what you are selling. However, there is no “free lunch” ,and the increased premium comes with the increased risk of large price movements in a volatile market. Think of it as selling car insurance to a 16 year old.The downside of using an iron condor is that when it goes  against you, it is more difficult to repair, and you can lose more money because you took in less premium by selling options that were further from the money.

 

The iron butterfly is also a trade that benefits from lowering volatility. It is structured by selling an at the money call vertical and an at the money put vertical with varying long wing widths. The iron butterfly has more narrow structures than the iron condor however it has a better risk to reward because your return can be so much higher on the money at risk than with the iron condor. This is because you received more premium selling the at the money options. Because it has this greater risk/reward the iron butterfly can be put on in a wider range of markets both lower volatility and higher volatility. Even though it is short volatility it still performs well even in lower volatility markets because of the risk reward. Both of these trades require that the price stay inside of a range for the trade to be profitable.The iron condor gives you more room, and the iron butterfly gives you less room for the price to move.  Overall in most markets I preferred the iron butterfly because of the increase risk reward.

Mark Fenton

mark@sheridanmentoring.com

How to Cheaply Trade Cash Secured Puts in a Retirement Account?

Trading Cash Secured Puts or Covered Writes, basically the same trade, is outrageously expensive in a retirement account. With FB at 165 today, Buying 100 shares at 165 and selling one 170 call at $4.50, expiring in 32 days, cost’s about $16,000 to trade!!! If doing an almost identical strategy called a cash secured Put, selling one 160 P at $4.50, the capital requirement is still going to be near $16,000. How do I do this type of a strategy in a very cost efficient way? Sell a wide put Credit Spread. Using FB as an example today. With FB at $165, I can sell the 160 Put at $4.50. Because the capital requirement is very high to sell the put naked, even if I have the capital too do it, I will look to buy a put against it at 15% the cost of my short put. My short put is going for 4.50, 15% of 4.50 is about $65, so look to hedge the short 160 put with the 140 Put . The May 18 expiration 140 Put is currently trading for .65. Now I have a 20 wide put credit spread, short the 160 Put and long the 140 put for roughly a $3.80 credit. My risk or margin is now $1620 for every 1 contract versus $14,000-$16,000 for every 1 contract doing a Covered write or cash secured put!! My profit target might be to make 8% for the month on my capital for 1 contract of $1620. That would be $130 for a profit target on every 1 contract. If I sold the credit spread for $3.80 Credit, I would look to buy it back for $2.50 debit. As far as a Maximum Loss, if I lost 10% would get out. Using this trade as an illustration, if the credit spread exceeded $5.40, would get out for a loss.

 

Dan Sheridan   dan@sheridanmentoring.com

Live FB Pre-Earnings Calendar Trade

With FB at 159.83 at 11:34 central time today April 9, I did a Live Pre- Earnings  Calendar

Step 1: Set up:  Buy 1  Apr 27  160 Call,  Sell 1  Apr 20  160 Call,  2.82 Debit.  Implied Volatility of long call is 47.71 and  Implied Volatility of short call is  35.98.

Step 2:  Profit Target and Max Loss:  Looking to make $30-$40 for every 1 contract, which would be 10-15% on Capital of $282. Max Loss would be around $50 or about an 18% loss on $282. So for a profit, when the Calendar price goes to the 3.15-3.25 area,  would  take off . When the price of the Calendar goes to around 2.30 from the initial debit of 2.82, I would get out for a loss.

Step 3 is When to Adjust and Step 4 is how to adjust. For today’s trade, I will stick with just step 1 and Step 2 and not get into Adjustments.  For people new to this type of a Calendar, let’s learn to walk before we learn to run.