Why I Sold A Narrow Iron Condor In EEM?

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Iron condor: In tonight's video, we're just going to cover the quick opening trade that we had today in EEM, but before I do that, I just wanted to give you guys a heads up. Some people have been emailing back and forth that, when I send out the alert every single night after the video is posted ... And this is likely a lot of new people who are just getting started, and that's okay. That's what I'm here for.

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So, today, like I said, we only got into one new trade today in EEM, and it was a pretty nice trade. I think we got pretty good pricing on it. I'd like to get around 190 for this trade, but it filled pretty quickly and I know that a lot of people got into it as well. It is definitely an iron condor because I had people asking questions about it. So, it is a regular iron condor, but it is very narrow at the top.

So, it looks very similar to an iron butterfly, which we've been doing a lot of lately, but we are just a little bit spread on our short strikes. So, you can see on the "puts" side, we went down to the 37s. We sold those. On the "calls" side, we went up to 38s. We sold those. And this is nothing more than just doing something a little bit different.

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The stock, at the time, was trading around 37.60 or so, and so what we decided to do is, you know what, instead of making a decision one way or the other, we're just going to go ahead and split the difference and trade on each side of the stock, about $0.50 out on either end, and make a nice, big iron condor.

And, again, you can see we're taking the same type of approach here, where we went $5 out, bought protection at the 32s. Same thing on the top side; went $5 out, bought protection at the 43s. This gives us some nice credit of about 183 overall. Here's a look at the chart of EEM, and you can see huge pop in volatility that happened.

And look, this is exactly why we have to kind of wait for these opportunities, right, because for the better part of the last four or five months, we haven't had an opportunity to trade EEM. It just hasn't had really great implied volatility until just recently. And you can see it's just been going crazy, right?

Now, anything can happen in the next couple days obviously, but what we're really looking for as we head towards August for this position is for implied volatility to calm down, to come back down a little bit lower, and that will really help these options decay in value and that will give us our profit a little bit sooner.

Now, what we did is made that iron condor, and so we've got pretty wide break-even points on this thing. We are giving this thing a little bit of room to move around and shift around here a little bit on either end. And really, that's just namely because implied volatility is so high and that allowed us to get such great pricing.

But this also serves as kind of a mini hedge for some of our other positions, like FXI and FXE. It's all the same emerging market-type stuff, so it just adds a little bit of diversification as well to the portfolio. Here is the actual underlying trade on the trade tab. So, you can see what we tried to do here is we went to the 37s on the "put" side, we went to 38s on the "call" side, and the stock closed today right at 37.50.

So, you can see we went an equal $0.50 difference out on either end just for our short strikes, and then from there, we went $5 out to the 43s and, we bought those, and we went $5 down to the 32s and, we bought those. So, you can see exactly the mechanics of how we're getting into this trade. Just selling the stuff that's really expensive and then going out a good distance and buying something that's pretty cheap; $17 on one end.

The calls on the top side were about $4, so very, very cheap protection, but that helps reduce some of the margin exposure in trades like this. If we just did this as a naked straddle or a naked strangle, we'd have a significantly higher margin exposure overall on the trade.

Now you can see the profit and loss diagram. It looks very similar to, like I said, an iron butterfly. It's got that huge, tall peak, but it's just a very, very flat tip out there at the top because we of kind of straddled the market here at 37 and 38. And again, from there, we go out on either end by the difference or the credit that we received.

So, you can see that our break-even points are right about 35 on the bottom side and almost up to 40 on the top side. So, we've got a pretty nice $5 range here that we can make some money with EEM. So, again, on the charts here, we've got a range up to about 40, and 35 is just down below the chart, but you can see a very nice wide range.

This is, again, only humanly possibly because implied volatility is as high as it is. So, we're leaving some room here to continue to add to this position. We want to get into things like this; EEM and FXI and FXE. We'll continue to add to these positions and stack them over the next couple of days and weeks.

But we don't want to do everything at once, and so that's why we're just doing one position now, knowing that we're going to continue to add to this position over the next couple days. Okay? So, as always, if you guys have any comments or questions, please add them right below in the comment section. I'll make sure I get back to all of those tonight or tomorrow before the open, and 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.