Turning Our AMZN Credit Spread into an Iron Condor

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Credit spread: In tonight's video, we're gonna go over all the trades that we made for Thursday, October 8th. So we only had two new trades today, two adjustments to current positions as we get closer to expiration. The first adjustment that we made was to our Amazon call credit spread. So we added this additional put credit spread a little bit lower than our call credit spread, mainly because Amazon had a nice move down earlier in the day that helped us out.

But we wanted to give ourselves an opportunity to take advantage of the move that Amazon made to the lower side by selling this put credit spread, taking in a nice big credit, and that, overall, is gonna help us, you know, reduce our risk on the trade and still give ourselves an opportunity to make some money.

So we took in a nice $175 credit on this. Again, helps reduce the risk in the trade, which is first and foremost.

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Now, here's our resulting position in Amazon. And again, today earlier, when we didn't have this put credit spread in, this is what our position looked like. We have this call credit spread in Amazon, and you can see the stock finished just beyond our break-even point. If we do nothing at all and the stock rallies from here even just for a couple of dollars, we stand to lose about $400 at expiration.

So, by adding in this additional side, this put credit spread side, we create an iron condor right around where the stock is trading right now. So you can see this is the new iron condor right here, and in case Amazon does continue to move back up, we only stand to lose about $230 on this trade, okay?

So now we've reduced our risk dramatically, almost cut it in half, and we're giving ourselves a little bit of room here for Amazon to end somewhere in this range.

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Now, of course, we did have to give up a little bit of downside, you know, profitability or possible profit to do this, but I think it's probably the better move. We've got a lot of positions that'll still make money if the market tanks from here. We need to be protected from trade like this in Amazon, which is so close to being in the money or out of the money at expiration.

So again, all we did is we just mimicked and matched the number of contracts that we had originally for the first trade. So you can see we did all the same width of contracts, $5 wide, and we sold one put credit spread, making it all even and symmetric, and it also reduces risk overall.

Now, the other trade that we adjusted today was our kind of weird position in XLU, I guess, 'cause we have short stock still. We rolled up our short put, which was practically worthless, from 41 up to 43. Now again, this 41 put is not worth any money. We had sold it for a good chunk of change. It's now gone down in value.

It's worth about, you know, $2 or $3, so we bought that back and we resold out the 43.5 put, and that gave us a net credit of $23. Now, it's not a ton of money, but at the end of the day, that gives us a little bit more balance in our overall position. So, here's where the position looks like right now.

And you can see it's still well within our break-even points, but what we need to see is we need to see time decay start to accelerate here in the last couple days for XLU. So we rolled up from our 41 strike, which was all the way down here. We rolled that up to the 43.5, and you can see that's where the profit/loss diagram right here pivots, at this point.

But right now, the stock is trading higher, around 44. We'd basically need the stock to stay kind of in this range or lower between now and expiration, but right now time decay is really not, our volatility and time decay really hasn't been sucked out of this position, but we're looking at probably another $100 in difference in premium, just purely on the time decay that's gonna happen over the next, you know, nine days or so.

So we're still gonna hold onto this position. I like this position a lot. It'd have to move, you know, a little bit higher, and we might even roll up this current put from 43.5 to a little bit higher and get a little bit more aggressive, take in another credit. But right now, I like where we're sitting with this position.

And again, you know, most of our positions are gonna be starting to adjust into some more, you know, bullish type trades if we start to see the market continue to head higher. So, as always, hope you guys enjoy these videos. If you have any questions or comments, please ask them right below in the Comments section on this page.

And until next time, happy trading.

About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.