Lesson Overview

EWZ Iron Condor

Yep in less than 3 days we banked a 69% profit on our EWZ iron condor trade. Mainly because (as we'll show) implied volatility dropped. What a surprise right? This once again proves why you should be picking strategies that fit the market and not jamming 1 strategy into every market. In this case our iron condor strategy was specifically designed to profit from a drop in IV. As soon as that happened our profit materialized.

Show Video Transcript +

Today where we are officially launching our podcast, I just wanted to let you guys know that of course, you’ll get the email about it, hopefully, if you haven’t already gotten it, but you will get it tonight about the official launch of the Option Alpha podcast.

It’s been so long in the making, but I want to thank you in advance for hopefully, a lot of people who will soon be helping us make this a top ranked and top rated podcast in iTunes.

Honestly, my selfish goal is that I want this thing to be the number one investing new and noteworthy podcast. And I’ve only got 14 days, so if you guys would obviously check out the podcast, go to the podcast page which is now live on the website, and then check out our interactive player. This thing is awesome.

It’s from Pat Flynn over at Smart Passive Income. I had a chance to meet with Pat earlier this year out in California and talk about business and talk about marketing and stuff like that to improve this website.

And by adding this interactive player right here on the website, you guys can just click back and forth through all of the different podcast that will be going out right from one page, or of course, you can subscribe in iTunes or SoundCloud or just a regular RSS reader.

But more than that, more than anything else, what would help is if you guys would simply click right here and go over to iTunes after you listen to one of the shows or a couple of shows and give us an honest rating and feedback and review.

And that helps us in this 14-day window here with iTunes launch in this podcast to throw this up at the top of the list and get us out there to more people.

If you think that you’ve gained one thing from us here at Option Alpha in watching these videos and being a member, or even if you’re on the trial membership, I would honestly appreciate if you could help us out and get this thing to the top of the list here on iTunes.

I’m excited about the launch of the podcast. I think it’s going to be awesome. We’ve got so many shows coming. You can just go ahead and go right to the blog page, and you guys will see all of the episodes that are coming in.

I’m going to be launching all five show notes over the next five days just to launch, and then we’ll have another four or five episodes over the next week or so. It’s going to be a lot of content that we’re launching just so you guys can see that.

You can just click on the show notes, and what that does is go through all of the different topics that we covered or tutorials or articles that we mentioned, any guest that we have on, we’ll link to their pages and their websites in there as well.

It’s just going to be a huge, huge resource for you guys, and hopefully, everyone is going to be excited about it. All that being said, now we go to obviously the trades that we’ve made today.

If it wasn’t enough to be launching a podcast and doing all that stuff, we did have a very active day of trading. It goes to show you that you can do both your day job, and that would be running the website and trading for me, and if you’re doing something else at the office, you can do that and make some decent trades as well.

Before we go over some of the opening trades, the earnings trades, I want to go over the closing trades in EWZ and EEM. Both of these saw huge drops in volatility from this past week.

And EWZ to me is a huge case study, probably one that we might end up covering on the podcast eventually and walking through step-by-step, date, time, etcetera with all these trades.

But the short story is with this trade here, the iron condor that we put on in EWZ, we put that trade on. You can go back to the video tutorials. We put that trade on Thursday of last week.

We have not been in this trade more than three days, and it's already seen the vast majority of its profit and value of it sucked out in there for a profit because we were short the iron condor.

But it’s seen so much value sucked out of these options purely, purely, purely (and listen close) because of implied volatility dropping. Now, the drop in the stock obviously was big today, but implied volatility dropping was even bigger.

Implied volatility was virtually cut in half in one day, and that helped us realize a huge profit in EWZ for three days of work. Not to say that this is how all of the tradings goes because we know that's not true.

But this is why we make position or take positions with the strategies that we select to take advantage of implied volatility. This is why you don’t buy options when implied volatility is high because even though the stock made a huge drop today, it was a huge number.

I figure what the actual percent was, but it was down almost 6% today. And here’s EWZ. What was even bigger than the drop in the stock was the drop in implied volatility.

I’m trying to show you guys that you have to be – What’s the word I’m looking for? You have to be strong enough willpower to make trades in the face of high implied volatility because when and if it does go down – And it always does.

Implied volatility in the markets is cyclical. What goes up comes down. What goes down comes up. When and if it comes down, then that’s the opportunity that you need to be positioned for in advanced to take advantage of that move.

We were lucky enough to get in on that trade last Thursday in EWZ. We saw a very nice profit in EWZ materialize in three days. You can’t help but just take the trade off. Implied volatility is now in the 17th percentile, cut in half in EWZ in just a matter of a couple of days.

Virtually, the same thing happened in EEM. We went ahead and closed out our iron condor in there. Same thing, implied volatility dropped, went ahead and bought back our 43/44 call spread and the 38/37 put spread for a $.15 debit.

We go to the chart here of EEM, and you can see the same thing happened. The stock has gone nowhere since we’ve made the trade, so the stock just traded sideways. But what we’re looking for more than that is a drop in implied volatility which helped materialize that profit much, much quicker.

For both of these, there’s no point in holding these trades just to save another $.15, $.16 in premium. You just get out of the trade because you’re not going to hold that all the way through November with the amount of risk that you’re carrying for that trade and not just walk away.

You got to take these profits. $144 and $54 on EEM for two fairly small trades, EWZ is a little bit bigger for us as far as position size. You got to take those profits and run to the bank with them.

The other trades I want to go over first are the opening trades for today. Now, we do have one regular opening trade, and then we also had three earnings trades. You’ll notice that we always tag the earnings trades.

For those of you who are new because we had a lot of new people join the free trial this weekend. For those of you who are new, we always tag the earnings trades as earnings.

It doesn't mean that you can’t trade them, it just lets you know that they are possibly one or two day trades and there might be some rolls involved. If you haven't seen some of the video tutorials, to understand them – Please obviously don’t make trades you don’t understand.

This is just educational. This is not a suggestion to buy or sell any security obviously. Don’t make trades unless you feel comfortable doing the strategy and the trade.

The first trade that we did make today was DOW. DOW has already gone through its earnings, so there’s no risk of earnings with this trade. And even though it’s gone through earnings, we did see implied volatility stay relatively high.

We’re just trying to take advantage of that, and we needed some positive Delta in our portfolio. We went ahead and sold the 45, bought the 44 strike and took in a $.25 credit on a $1 widespread in DOW.

In DOW, implied volatility has stayed relatively high. It did drop after earnings, but you can see it’s still up in the 62nd percentile. We think at some point, maybe DOW will continue higher, but I don’t know where it’s going to go.

All I do know is that we needed some positive Delta in our portfolio. That’s why we decided to do the put spread below the market, versus doing the call spread above the market.

If you need negative Delta in your portfolio, go ahead and add that call spread above the market. It doesn’t matter. You can still match up those same probabilities on either side.

Alright, for earnings trades, we did have three different earnings trades that we made. I’m going to start with Coach. Coach, I start with because it was strangling versus an iron condor.

And really, this was nothing more than just use of capital. When we looked at trading a strangle in BIDU, it’s a very expensive stock, $253, $254, a very high price, so the strangle cost a lot of money to carry in the margin.

With Twitter, it’s just a huge unknown. And all of these things are unknown for earnings. But Twitter, since we don’t have as much trading history for Twitter, it’s a huge unknown to get into a trade like Twitter just naked, at least for me with a strangle.

With Twitter, very liquid, very tight markets, so we were able to get into an iron condor versus a strangle just purely using our capital wisely. When it comes to Coach, however, Coach, still liquid markets, good company for earnings, we’ve traded them before in earnings and had success.

For us, it came down to a matter of just getting a little bit more credit. We were able to take in $.70 of credit. This is because we didn’t have to buy these other legs like we did in BIDU and Twitter.

We don’t have to buy those other legs and use some of that premium. We can, therefore, funnel everything that we sell on either side to $.70 around Coach. That does move our breakeven out almost another $.70 on either end.

It gives a little bit more of a comfort range in Coach. That’s really what we did in Coach, just used the strangle. It was a good use of capital; the margin wasn’t that bad, it was a couple of hundred dollars per strangle.

We kept it small obviously as we do with all of these earnings trades. Keep them very small, so that you can manage them and appropriately size your risk around earnings.

It’s a matter of getting a lot of earnings trades on not necessarily the size of the earnings trade because, over time, they should fit the probabilities that you’ve been trading.

I’m not going to cover too much of these earnings trades tonight only because – And you guys have seen video tutorials on them before, we’ve done a lot of earnings trade.

But I’m going to use some of these as case studies tomorrow night on the webinar. If you haven't signed up for the webinar, I honestly believe there are probably two spots left. I think I got an email before I started this recording that one of them might be gone.

I think there are two spots left in the webinar. If you want to sign up for the webinar on earnings trades, now would be the time to do it because I’m going to send out all the information tonight to everyone.

But we’re going to talk about everything that goes around making earnings trades, how you select strikes, making adjustments, rolling contracts, why we go with the weeklies versus the monthlies.

We’re going to talk about all of that tonight for an hour, and then obviously have open-ended questions at the end. If you want to jump in on that discussion, learn how to make some of these earnings trades, now is a time to get in.

Alright, that pretty much ends the video for tonight. Like I said, I appreciate you guys watching. If you have any comments or questions, please add them right below this video.

And again, remember to go ahead and check out the new podcast. And if you could, please, please, please, leave me a rating or review. I’d love to get the Option Alpha podcast to the top of the charts. Happy trading!

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