IWM Iron Condor Trade How to Profit from Volatility Decay

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Iron condor: In tonight's video update, we're going to go over all of the trades we made for Tuesday, September 8th. So hope everyone had a great long holiday weekend, Labor Day holiday, and back to the markets just for a couple of days, short week, with the holiday on Monday but it started off on the right foot.

Markets were higher today, that was nice, nice to see a little bump, it dropped, that was also really nice. So, to start off, we had some closing trades. These are automatic closing trades that we had filled today, both in IWM on our iron condor, we bought that back at just under 50% of max profit.

And then bought back our Straddle on the X, which was the 34 call and the 34 put for 209 debits, so nice profit of $73 on those as well. And again, all we're trying to do here is be as systematic as humanly possible. 

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So, IWM, take a look at this trade. We entered this trade back here, towards the end of August expiration. Now just about two weeks into it, it's now dropped in implied volatility, and that's really what's given us the bulk of the movement in our profit, or the bulk of the decay in the option is this drop in implied volatility.

The stock has gone nowhere since the time that we entered it, and the time that we exit the trade, so you can chalk this one up 100% to implied volatility dropping. That's where we made our money in this case. Pretty much the same thing with BX as well. Now about Deere, today we made an adjustment to our trade.

We had an earnings trade on John Deere, obviously the stock gapped lower and then obviously the market fell, so that didn't really help us at all, but all we're trying to do here is just, again, try and stop the bleeding a little bit by rolling down our calls from the 87 and a half calls, which are practically worthless, down a little closer to the market to the 82 calls.

And again, this is facilitated by doing a vertical credit spread order. So, in the case of the vertical credit spread, you're going to be selling the 82 calls. You're buying the 87 and a half calls, but you're buying them back, so that facilitates the closure of the 87 and a half in the re-opening of the 82's.

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Now all of this we did for a net credit, obviously, of 70 cents and the whole idea here is that we're taking something that's far out of the money. These 87 and halves, which are somewhere in here. We're rolling them closer to the market down here to around 82. And we're just getting a little bit closer because now we've got 10 days to go until expiration.

Implied volatility still fairly high so we can get some good premium out of these. And again, all we're trying to do is just swap out trades that are not worth it. So, holding the 87 and halves, which are all the way out here, worth about $11. So, there's no point to hold those for the next 10 days and make the $11 that's left in the premium.

They've pretty much decayed as far as they're going to go. We originally sold them, I think, for much higher than that at about maybe a buck 20, a buck 30, something like that. So, we made a lot of money on those individual options. Now we have to come closer to the market and sell the 82's and get some premium out of those.

Now notice, we didn't go all the way to where the market is. So we still want to leave a little bit of room. There are 10 days to go until expiration, so we don't want to, kind of jam this position right on top of where the market's sitting right now. So we went out to the 82's, still have good premium, pretty decent volume on these.

So it was an easy trade to get filled in, and I think most people did get a fill on that actual execution. So, all we're trying to do here, again, is just to give ourselves an opportunity to make back some of the money we lost on the initial drop after earnings. So, here you can see, this is where the stock in trading right now.

Ideally, we'd love for the stock to be up around 82 and given that it's had a nice little rally, generally, in the market, I'd love to see DE and some other stocks kind of rally back. Overall, on the whole portfolio, today was a great day. I mean, we're up a couple of hundred bucks today, just in time decay and volatility decay so I can't be too mad about that at all.

It was a nice day. Not nearly as good as last Friday but it will take it. These dates add up when you're selling premium, and we can just sit back and relax here just a little bit. As always, if you guys have any questions at all, please ask them right below in the comment box 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.