Options Laddering With FXI Iron Condors

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Iron condor: In tonight's video, I want to go over all of the trades that we made for Monday, April 20th. We only had two new trades today, one opening trade in FXI and then also an earnings trade that we got into in IBM. Let’s go over first the trade in FXI. And we added another set of iron condors to our portfolio. Now, we have a couple of iron condors that we’re currently trading at May expiration, and we’re now going to go out to June.

Not that we couldn’t have done May. We could still probably do May. There are about 25 days left in the expiration period. And although that’s relatively tight, it’s a little bit too close in for our comfort; we could still do May if we wanted to. But at this point, we already have a position in May, so now we’re going to go ahead and stack or ladder these trades out to the next month, and it still gives us an exquisite premium.

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For FXI, we went ahead and sold the 55/57 credit call spreads and the 45/43 credit put spreads. That provides us with an overall credit on each of about $55, so a pretty good size position. And you can see that we’re trying to increase our position size a little bit because implied volatility remains high in FXI. Now, we caught most of the higher points in implied volatility. It’s gone down from the 100th percentile down to about the 72nd percentile right now.

And that's still relatively high, so we want to be aggressive in selling premium here. And especially since the stock has been all over the place and has jumped from about 42 up to about 52, I don’t want to take any directional bet. I want to be pretty neutral. I want to be right around where the stock is trading right now, and I want to take a pretty neutral stance on it, assuming the thing just move sideways or calms down or implied volatility drops, one of the three, and that obviously gives us an opportunity to make some money.

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As far as what the trading strike prices look like, here is how far out we went. We came out to the June contracts, we tried to do each side at about a 20% probability of being in the money, and that just gave us a little bit more premium and then also, it helped us get into some of the bigger contracts that were a little bit more active. You can see these 45 puts on the lower side pretty confident, about 12,000 contracts of open interest.

On the call side, you can see that these 55 calls are pretty active, about 22,000 contracts of open interest and 1,400 contracts traded today, so beautiful liquid for this size of an ETF and has been one that traders are getting a lot more into because of the recent move. We tried to make it about 20% on each end, took in a pretty decent premium although it could’ve been a little bit higher, trying to trade this thing directionally just sideways and see an implied volatility move down.

The other trade that we got in today is an earnings trade in IBM. This is an excellent trade. I like this trade. IBM already announced its quarterly results after the market closed. The stock pretty much is about the same as where it closed. It hasn't moved anywhere which is nice. As long as everything stays pretty much the same as where it is tonight, we should have a nice little profit in IBM tomorrow morning.

We went ahead and did the iron condor with the weekly contracts. You'll notice if you're a new member that we always tag any weekly deals and just say “weekly” in the alert just so you guys know and it’s this April 4. Just as a refresher, we’ve got a great video tutorial in the membership area about expiration tags on the weekly contracts.

But with April, you can see that there's a number 4 next to APR and that just lets you know it’s the 4th week in April. It’s the weekly contracts that expire on the 4th week in April and that gives you a magnificent idea of when those expire. They do expire this Friday, but it gives us a couple of days. We always want to trade those front most contracts.

We went ahead and did the 170/175 credit call spread, and the 160/155 credit put spread down below the market. This got us about a $10 range in where the stock might trade and took in a pretty decent premium of about 158 overall. What we're looking for here with IBM is just the stock to trade pretty much sideways or not make any real significant movements between now and opening tomorrow for earnings.

And since it's got a pretty good history of seeing a drop in implied volatility, we’re banking on that. It’s one of the trades that had a much higher implied volatility as we start to get deeper and deeper into earnings season. I expect implied volatility to drop like a rock tomorrow morning as soon as this thing opens, especially if the stock trades sideways, doesn't make any significant gaps up or down. It’s going to create a pretty violent volatility crush which is going to help our position.

This is what the position looks like with just the strategy page here or the analyze tab. You can see just a very nice, even and balanced iron condor on either side of the trade. The expected move in IBM was about $5, so the stock closed around 165, 166 and that gives us ample distance between where the stock closed and where our breakeven points are which is about $1.58 outside of our short strikes at 160 and 170.

We have some room here. We’re outside of the expected move, and we took in a pretty decent premium to get into this trade. Like I said, unless something crazy happens between now and tomorrow's open, we should have a nice $150 profit here or so in IBM.

As always, I hope you guys enjoy these videos. If you have any questions or comments, please leave them below this page in the membership area. If you're watching this video somewhere else out there online or on YouTube, you just have to understand that you're getting this video about 10 to 15 days after it's sent out to our members, so if you want real-time alerts and a video just like this that goes out every single night with those alerts, you’ve got to sign up for a membership at optionalpha.com. Until next time, 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.