Lesson Overview

MSFT Skewed Iron Condor

Following a fairly significant sell-off in MSFT stock we saw an opportunity to enter an iron condor trade as implied volatility remained high. But instead of creating a balanced iron condor we decided to skew it towards one side of the trade. In this video we'll cover how we selected the strike prices for this skewed iron condor trade in MSFT to minimize our risk should the stock rally higher after the sell-off. Plus a bonus look at the details on our adjustment to an current iron condor trade in GLD as we near expiration.

Show Video Transcript +

Tonight, we’re going to go over all of the trades that we made on Tuesday, December 16th. We have one of each today, one opening, one closing and one adjustment trade, so a fairly quiet day even though we had three trades.

We’ll start off here tonight going over Microsoft. This was a late entry, so I just want to get it out. I didn’t have too much time to write up comments before the alert went out.

But we did do an unbalanced iron condor in Microsoft and just trying to take advantage of all the stocks that have high implied volatility right now.

Microsoft is one of the ones that's very, very liquid along with Apple and Google, etcetera, and Facebook. It’s one of the more liquid stocks that's very highly traded, so easy to get in and out of.

We went ahead and added two of the Microsoft 49/50 calls, that's the $1 wide strike on the call side, and on the put side, you can see we did a $2 wide strike very similar to what we did last night as well where we have a little bit more risk on the put side.

We’re playing this a little bit tilted to the bullish side. Even though it’s still an iron condor, we are trying to minimize our risk if Microsoft does happen to rally back and then take off from here.

But overall, we took in a decent credit for this trade, about $.26 on this trade and I like the setup that it’s going through. Here's a look at the chart of Microsoft.

And you can see down here on the bottom that implied volatility has spiked up into the 90th percentile, so very, very high implied volatility and that just really helps us get in and out of these options very easily with great premium. Our trade was the 42 and then the 49.

You can see our short strike down here below was the 42, and then up above is the 49s. That’s the range that we’re looking in, not factoring in breakevens, so a very wide range and that’s helped by this implied volatility.

And like I said, we gave ourselves a little bit of tilt to the bullish side just in case Microsoft does rally back from this point. Sometimes when we've seen spikes up in implied volatility, that just sets the basis for a possible rally in Microsoft.

We don’t want to get caught with a full risk trade to the topside of the market, so that's why we did what we did. Here’s a look at the profit loss diagram. And you can see that with Microsoft we had that skewed or tilted iron condor.

We have more risk to the bottom side with the 42/40, and then on the topside, we only gave ourselves a $1 wide strike, so if Microsoft does happen to rally higher and go way higher than 49, we only stand to lose about $300 versus about $700 that we’re risking to the bottom side.

We’ve already got a lot of positions that are already tilted bearish, and we could make some money if the markets fall and continue to fall, so I don't want to discount that fact that this is working in our overall favor and making us a little bit more balanced overall.

You got to always include that in your portfolio. If your portfolio is already balanced and maybe this is your first trade with us, (I know a lot of new people signed up this week) then maybe you might want to do a $1 wide spread on either side.

But in my case, I needed a little bit more positive Delta in my portfolio, so I tilted this towards the bullish side to give it a little bit more positive Delta. But you can do it on either side. The probabilities are still going to work out about the same on either way. It’s just a use of capital.

For closing trades, we did go ahead and close out of SMH. Now, this was a vertical roll that we had rolled from December out to January, and we bought it back today because I just think that SMH has run its course.

It’s a weird stock, and although it’s very liquid, it just hasn’t performed as well as we thought and had done what we thought. It sold off, but it just maybe has reached a pinnacle and might turnaround.

At least at this point, we’re taking this trade off with a loss of about $120 loss which is just 30 per contract after all the rolls. I know that in the alert I said we’re taking a profit.

That was just on this side of the roll, so it didn’t include all the rolls, and that's my fault for not just being 100% clear on that. When you look at SMH, it just is a stock that has had a nice move down; implied volatility is starting to spike up.

All of that is okay, but we already had a short premium there, so it didn’t help us all too much other than the move down, so I think we might be coming towards some bottom here in resistance level for SMH, so we went ahead and got rid of the trade.

I think there are better trades out there, just better use of our capital and I didn’t want to tie it up anymore in SMH. And then the last trade we want to go over tonight is our final (hopefully) GLD adjustment, and that is selling the 116/118 call spread.

I think we’ve been doing a pretty good job this month. It’s going to be a really interesting case study regardless of where GLD ends up as far as making adjustments to gold and mirroring the trades or mirroring the market a little bit as far as movement.

Since gold had a nice jump lower today and then subsequently rallied back just a little bit, we decided to add another call spread to our trade and still keeping with the theme of the same number of contracts, so the same three number of contracts, and the same width of the contracts being two.

We took in a nice credit on this adjustment, another $.50 that just helps add and buffer ourselves against a possible loss in GLD as we run up against expiration. What our final position in GLD looks like is this.

And you can see once the chart loads up is that we’ve got just what looks like mostly an iron condor, but it’s got a little bit of a butterfly skew to it. It looks like a broken wing butterfly.

And those of you who traded with me before know what this strategy looks like. But what we help do was by adding this trade, we’ve re-centered the strategy as much as we could over gold’s current price which is about 115.

We definitely needed gold to trade a little bit higher over the next two days, but at least at this point we’ve already locked in some profits on the short 118 calls that we bought back, so that’s helping us out as well, but it’s going to be a really, really tight window here and we’ll see which way it goes.

We may make one more adjustment, but overall, I think we’re just going to stick with this one and ride it out here, but I’ll be a really interesting case study to look at, but that is the adjustment that we made in gold.

As always with the adjustments, you want to take in a credit and reduce your risk, and that's exactly what we did with this adjustment. We took in credit, we reduced our overall risk on the trade, so there’s nothing more you can ask for, and now you just got to let the market do its thing and see where you end up.

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