Lesson Overview

GILD Iron Condor

In this small trade that we made before the holidays we were able to take advantage of really high implied volatility after a big gapping move lower in GILD.

We were then able to sell an iron condor with strikes $5 wide on either end and taken a $100 credit for the trade overall. By selling our strikes at about a 15% probability of expiring ITM we added this 70% probability of success trade to our portfolio.

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  • Steve Breakstone

    Love your videos, On this one, did I miss something or did you not talk about the outer protective wings of the condor;? I think that additional info would have made the video fully complete. Otherwise, thanks…I think you provide good videos and I’ll be sending it to others who I think might appreciate your info.

  • Generally with iron condors you should enter them so you set it and hold it. I don’t prefer to make adjustments but if we do we’ll just roll the “un-challenged” side closer for a higher credit. We’ve got a whole section on adjustments, triggers, etc here that will help: https://optionalpha.com/members/video-tutorials/trade-adjustments

Show Video Transcript +

Tonight, we’re going to go over just the one opening order that we had in GILD for a new iron condor trade. Since we only have one trade today, it was a fairly quiet market, and we’re getting into the holidays.

Obviously, I wanted to take a little bit more time and go over this trade as opposed to just breezing through it if we make a lot of trades during the day. This will be a little bit more in depth tutorial on the iron condor that we entered in GILD. Here are the specifics on the trade.

We went ahead and sold the January options which are about 24 days out and did on the topside of our iron condor the 100/105 call spread, so that's selling the 100 and buying the 105.

And on the bottom side, we did 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 then 75.

The whole idea with this trade is that we want GILD to stay between 100 and 75 between now and January expiration. That’s the basis of the trade mechanics. If we get into the chart here, this is the setup that we had with GILD.

You can see that it had a pretty big gap opening just a couple of days ago as we started to get into January expiration month and continued to move down. And today when we entered this trade, it was trading a little bit lower.

I think it was trading around $88 and it closed at $89.45, so it did rally back towards the end of the day. But what I like about this trade is two things.

One is that we can get semi-directional and we placed our trade around this new gapping move, 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. You can see the IV rank is up 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 GILD.

Now, when we talk about actually placing the trade and the trade mechanics, so the strike prices that we’ve selected, we went ahead and decided to go on both sides of the trade at about 15% out of the money.

That's where we placed each end of the trade. And you can see right now that 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% probability 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, you can see that 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 probability has moved up to about 16%.

By placing the trade at a 15% probability on each end, that gives us a 70% chance of success on this trade. We placed our call spread at 15%, our put spread at 15%, we add that 2 % just 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. Now, you’ll also notice that the strikes that we selected were not randomly selected.

They were some of the more higher liquid strikes that GILD had. You can see that not only the 100 strikes here which we’ve sold but also 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 gone the 75, 72.5. Same thing on the topside with 100 strikes. We could’ve gone the 100, 102 or 103.

And they had good liquidity, but not great liquidity like this, and that’s 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 easy to get in and out of if we need to.

When we look at the analyze tab, this is what the profit loss diagram looks like currently. You can see GILD is trading right here in the middle of our screen where I’m drawing the arrow, that’s currently where it’s trading, and we started to lose money at about 74 and 101, so that's the profit window that we have.

It’s got 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. If we go back to the chart here, you can see that 75…

I have zoomed out just a little bit. But about 74 or somewhere in this range right here and about 101 somewhere in this range right above the stock right now. 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.

Now as always, if you guys have any questions about this trade or any of the trades that we have, just go ahead and leave a comment in the comment section on the new trade alerts page. And until next time, happy trading!

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