How To Enter An Iron Condor In NFLX

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Iron condor: In tonights video we're going to go over all the trades that we made for Monday, June 15th. The first one that we're actually going to cover tonight is our closing trade VXX, now this is a trade that we actually entered back in May, then rolled it out to June. At the end of the day, we just ended up deciding to go ahead and close this straight out.

We were playing long volatility but the markets been so incredibly calm and low volatility has kind of persisted a little bit too long that it's really not worth holding this position any longer if we want to get into another long volatility position, we can adjust our strengths at this point, but rolling this straight to the next month if we wanted to keep that same process, would've actually cost us money in this case which would have added to the losses and potentially put us in a worse situation.

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In some cases it's better to go ahead and close up the trade and readjust your strike prices so that you have kind of the new barriers to work with in the next contract month. In this case, after all the adjustments that we did, we ended up buying it back for 194 debit, took a small 109 loss on it. Not a very big loss at all. Like I said, this is what the VXX has done, it's just continued to kind of grind lower.

At this point instead of trying to adjust and roll for something that has a break even point much much higher than where we are now, it would be better for us to close out the trade, readjust, and if we still want to be long volatility than move our strikes lower and kind of reset everything from there instead of trying to pay to roll this contract out.

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Now, the next trade that we did get into today are two iron condors. One, is a little bit more of an aggressive strategy, an iron butterfly in FXI and then the other is just a regular old iron condor in Netflix. Lets first cover Netflix, we decided to do the iron condor in Netflix because Netflix had a really high pop in volatility ... and so lets try to bring up the chart here real quick, but Netflix had a really high pop in volatility, and what that did is that created an opportunity here for us to sell some volatility and some premium in Netflix and go really far out of the money in doing that.

We were able to go all the way up to the 750-755 CALL spread, above the market and all the way down to the 555-550 PUT spread below the market.
We've got a very, very wide range, almost a $200 range that Netflix can trade in over the next month. We took in a nice little credit of a $1.38 now; we only did this position very small because it is a $5 wide spread and we do have earnings that are coming up towards the latter half of this cycle.

Normally, we don't really like to trade volatility heading into earnings, but at this point volatility is pretty much got in to as high as it usually gotten before when Netflix has earnings, it's just happened early in the cycle. Our hope is that Netflix trades in a very small range between where our CALL strike is up at 750 and our PUT strike is down here at 755.

We hope that Netflix trades in this range, which is should do about 70% of the time based on the probabilities right now, that would give us a nice little profit and hopefully in the mean time volatility just drops a little bit before the actual earnings event. We actually go to the trade page, again like I had mentioned in the E-mail alert, what we did here with Netflix is we set each of these short strikes on both the CALL spread and on the PUTS spread, right at the 15% probability of being in the money, so we went out and we said, "Okay, the 750 CALLs, we're going to set those at the 15% level."

And some thing with the 555 PUTS, we're going to set kind of our base, strikes, or our short strikes at the 15% probability of being in the money level. All right so you can see in here, in Netflix, again with the July contracts which have about 32 days to go. Looks like they're loading up here.

You can see that our short strike down on the PUTS side right here sitting right at the 15% probability level so we just found that probability level that we're comfortable trading and then just placed a trade right at that same level. Same thing on the CALL side. We go up to the CALL side, you can see that we're basically sitting right at the 15% probability level of being in the money on the CALL side and that's basically how we determine our strikes is we determine how or what probability we want to be trading, then we go out and we find their strikes and see if the pricing kind of fits what we're trying to do.

That's the trade that we did in Netflix. The other trade that we did was in FXI so we went ahead and sold an iron butterfly in FXI and we went a little bit more aggressive in FXI because implied volatility is just a little bit higher, and we're staking this trade so we already have a position on in FXI that's already profitable for July, we're just adding this position to it, continuing to build a position in these securities that have really high implied volatility.

In this case we sold the 48-53 CALL spread and the 43-48 PUT spread, notice that our short strikes are exactly the same at 48. We basically did a straddle right over the market at 48 and then we went out $5 on either end and we bought protection $5 above and $5 below at the 43 strike and the 53 strike away from the market.

We took in a nice credit of 275 we did a couple of those contracts we'll continue to add things like FXI as implied volatility continues to rise so where the stock continues to fall or rise whatever, we'll still scale into these types of positions. This is the thing that we want to be in. Here you can see that implied volatility is still pretty high in FXI and the stock is just seeing a little bit of a drop so we just want to stack this position right on top of the other one that we already have.

As we go to the trade tab here of FXI ... actually lets go to the risk graph here at FXI. You'll see that our position now that both of these iron condors or iron butterflies that we have working in FXI, the on that we put on originally which is already profitable and this new one still give us basically the same shape that we're still pretty much short implied volatility and premium right around 48-49 that's kind of sweet spot right now for us.

If FXI continues to move lower than we'll just continue to add positions and that'll just make this base, basically this iron butterfly and this kind of profit loss that I ... kind of shift and go as the market moves so we can roll down strikes in the process. In this case, the key point here is that we want to continue to scale into these types of trades, these are the trades that you can't be afraid of because implies volatility is high, generally speaking, the stocks been moving more or less in a side ways fashion.

It's been a really popular vehicle for us this year and we want to keep moving more and more money into FXI we just want to do it in increments, we don't want to plow 10% of our portfolio into this thing in one fell swoop we want to do maybe half a percent and then another half a percent or one percent and then one percent.

Whatever works for your portfolio but that's the key is to keep adding to this position and stacking the trades on top of another. Hopefully you guys enjoyed this video, if you have any comments and questions please add them right below inside the membership area that way everyone has a chance to see them and respond as well and help you out 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.