Lesson Overview

Entering An FXE Skewed Iron Condor

Skewed iron condors are a great way to take slightly directional risk in an overall neutral position. Recently, with higher implied volatility we were able to enter this FXE skewed iron condor with a smaller strike width on the put side which helps reduce our risk should FXE and the EURO continue to move lower over the next month.

Show Video Transcript +

In tonight's video, I want to talk about our new opening trade that we had today for an iron condor in FXE. It was the only trade that we had today.

The markets were active; stocks were selling off pretty well today, a lot of the stocks that we watch, including some of the major indexes, closed pretty much at their lows on the day.

It signals to us that the selling might continue or at least the path of least resistance here is to the downside in most of these stocks that we’re looking at. Now with that in mind, we did enter a new position in FXE.

Our FXE position was an iron condor, but it was a little bit different in the fact that we had a skewed iron condor. We obviously know that the markets are under a little bit of pressure right now and we don't want to set ourselves up for a really bad situation in case FXE does continue to head lower.

What we decided to do is do an iron condor, but a little bit different and skew one side, so that we have a little bit less risk to the downside in FXE if it does, in fact, continue lower.

I’ll go through it here in a second, but the logistics of the trade are that we sold three iron condors. In FXE, we sold the April 109/111 call spread. You'll notice that is a $2 wide call spread on the topside. And on the bottom side, we sold a 102/101 put spread.

That put spread is only $1 wide. This is where the skew is in our iron condor. It's skewed to the bottom side, meaning that we have less risk to the lower side of this iron condor because it has a more narrow strike selection on the bottom side on the puts.

We still took in an overall credit of about $.35 for each of these iron condors that we sold, so we took in a pretty decent credit overall. Here’s a chart of FXE.

You can see the currency is definitely under a lot of pressure coming down and selling hard and implied volatility has now started to spike up from where it was earlier in this month.

Now it’s at about the 78th percentile which is very, very high implied volatility which allows us to go ahead and sell this iron condor in FXE. But what we’re trying to do here with the skew is just minimize the risk that FXE does continue to move lower.

We want to reduce that side of the trade and cut that potential loss if FXE falls. What we did just logistically is we went in, sold the $2 wide call spread above the market. You can see this is where our positions are.

We sold the 109s, bought the 111s, so $2 wide. And then down below the market, we only sold the 101 put spread on the market, so only a $1 widespread below the market.

And you can see now on the risk profile that this is the iron condor that we have and you can see the skew that's created to the bottom side here because we only have a $1 wide strike. We are taking more risk to the topside of this trade.

And if FXE does continue to move higher or reverses and moves much higher than 109 or 110, we do take in more risk to that side. But right now, with everything that we’re seeing, the technical’s and the way the market is trading, we think that most of the risk is to the downside in this trade, so that's why we want to protect ourselves on this end of the trade.

Looking at this trade overall, we could make about $105 if it lands inside of our range, about between 102 and 109. Outside of 102 or below that, we could lose about $195.

And if it does happen to go up before any adjustments because we would obviously make adjustments to this trade, we could lose about 495 to the topside of this trade. It’s a very clean, very good-looking skewed iron condor, really good case study for us to look at here tonight.

As always, if you have any comments or questions, please add them right below. And until next time, happy trading!

Join 209,817 Options Traders

Membership is always FREE & you can upgrade anytime to unlock software tools.