Steps for Selling an Iron Condor
This will be a little bit more in depth tutorial on an iron condor that we entered in GLD. Here are the specifics on the trade. We sold January options which are about 24 days out and on the topside of our iron condor sold the 100/105 call spread, so that's selling the 100 and buying the 105. And on the bottom side, we sold the 75/70 put spread, so that's selling the 75 strike puts and buying the 70 strike puts.
Altogether, all the buying and selling that we did was a 102 credit, so we took in about $100 on this trade and that moves our breakeven point out about $1 on either end on either side of our short strikes at 100 and 75. The whole idea with this trade is that we want GLD to stay between 100 and 75 between now and January expiration. That’s the basis of the trade mechanics.
What I like about this trade is two things. One is that we can get semi-directional, so maybe the stock might head slightly lower to just trending sideways and that's sometimes what happens after a stock gaps. It gets re-priced dramatically in the market and moves down, in this case, almost $15, and then from there, it just got to trade sideways for a little bit. That’s what we’re hoping to see happen.
At the same time, we do have higher implied volatility. The IV rank is in the 84th percentile. It means almost 84% of the time over the last year, implied volatility has been lower than it is right now. That means that if we trade a strategy that takes advantage of a drop in implied volatility, then we should have pretty good odds on our side that over time, we’re going to see that drop in implied volatility in GLD.
When we talk about actually placing the trade and the trade mechanics, the strike prices that we’ve selected on both sides of the trade are about 15% out of the money. That's where we actually placed each end of the trade. Our 75 strike puts are currently about 12% probability of being out of the money.
When we placed the trade earlier today, those were at about a 15% likelihood of being out of the money and that’s come back down a little bit as the stock rallied just a little towards the end of the day. It's gone down to about 12%. On the topside, we also placed the trade at about a 15% probability of being in the money by expiration, and as the stock rallied throughout the day, that possibility has moved up to about 16%.
By placing the trade at a 15% probability on each end, that basically gives us a 70% chance of success on this trade. We set our call spread at 15%, our put spread at 15%, we add those together and we’ve got a 30% chance that it goes outside of that range, therefore it’s got about a 70% chance that it lands inside of that range which is what we want to see on this trade.
The strikes that we selected were not randomly selected. They were actually some of the more higher liquid strikes that GLD had. Both the 100 strikes here which we’ve sold and the 105 strikes had incredible liquidity and volume open interest for the day.
All of these strikes that we selected were some of the more liquid stocks. We didn't go to the 2.5 strikes. We could've finished the 75, 72.5. Same thing on the topside with 100 strikes. We could’ve reached the 100, 102 or 103. And they had good liquidity, but not excellent liquidity like this, and that’s really, really good liquidity to see 7000 contracts traded in a day with almost 27,000 of open interest. There’s a lot of players in the market which makes it really easy to get in and out of if we need to.
We want GLD to trade between 74 and 101 and then we have an opportunity to make about $100 on this trade because that’s the credit that we took in. We gave ourselves a pretty good window of opportunity here to make some money. As long as GLD trades inside this window and closes this window between now and expiration, we have a pretty good chance of making money, it’s about a 70% probability, so that's what a high probability iron condor trade looks like.
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