In the previous blog post I put on a SPX Iron Condor

I just took off Mondays High Octane short term Iron Condor for a 12% profit in 3 days. The trade was in the July 6 expiration.

Buy 1  JUL 6  2750 C, Sell 1  JUL 6  2745 Call,  Sell 1  JUL 6  2660 Put,  B 1  JUL 6  2655 Put.

I sold the Iron Condor Monday for 1.35 Credit, and bought it back today for .90 debit.

Dan Sheridan

dan@sheridanmentoring.com

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

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

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