How To Enter A Skewed Iron Condor

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Iron condor: Today, we’re going to go over all of the trades that we made on Tuesday, November 4th, Election Day, so hopefully you guys got out there and had a chance to vote which is always important to do on today. As far as trades that we had today, we had two opening orders and then two closing orders, so a relatively light day. I think that I'm pretty happy about the closing order first of all. And I just want to cover some of these closing trades first.

I'm very happy about the HLF closing that we had on earnings because Herbalife actually opened up down and rallied early in the morning and we had an opportunity because of that rally to not get greedy and take the trade off because it produced a nice little profit and that’s our mantra and what we do mechanically, is if it opens within our standard deviation range and within the range of our strangle or straddle, whatever the case is, that we’re going to go ahead and take that trade off and take the profit and not get caught sitting on our hands waiting for a little bit more money.

I'm very happy that we did that. I think that that ended up being the right move because we were able to take off this trade, the 65 call and the 45 put, and really, the only one that was really in jeopardy here is the 45 put. We were able to take that off for an 111 debit and bank a nice little $58 profit, so not too bad as far as that's concerned.

When you look at the actual chart of Herbalife though, you can see that it ended the day down around 44.26. It did go in the money at the end of the day, hence why I think it's sometimes necessary to take trades off at the beginning of the morning. Now, that's backfired on us one time so far this earnings season where BIDU opened lower, and the options were in the money, and then BIDU rallied right after that.

We could've had an opportunity in BIDU to close out the trade with a profit, instead, we were rolling it to the next month and have to deal with it now with November. But in this case with Herbalife, it ended up being good.

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What’s interesting about Herbalife (and I just want to stay on the same topic) is that implied volatility did drop, but it didn't fall that far. It didn’t drop as far as some of the other ones out there and mainly because the stock closed down almost 20% today. It’s a huge move in the stock for one day. What we did decide to do is take advantage of this.

Now, we made some good money in the earnings trade, we wanted to go ahead and reset the clock here on Herbalife and went ahead and added an iron condor for December. We went all the way out to December, it’s about 45 days away, the sweet spot in selling options, and we decided to sell the 55/60 call spread, and the 30/25 put spread. Now, what you'll notice is that we did give ourselves a little bit more room to the downside.

Herbalife was trading right around 45 when we made this trade, so we gave ourselves about $10 of room to the upside, and we gave ourselves about $15 of room to the downside. This is a skewed iron condor, and this is something I think that’s crucial to do, is that if you have an underlying assumption or you’re just weary about one side of the market versus the other, go ahead and skew your iron condors. It's okay to do that.

And you just have to slide down one side and slide out the other side. In this case, we came in a little bit closer on the call side, the 55/60 call spread and went all the way down to 30/25 on the put spread. Now overall, this still was taking in a very, very good credit, so it’s a very nice trade. Still, a very high probability trade and the premium have been superb in Herbalife, hence why we did that.

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We go back to the charts here and before we look at the pricing diagram, let me just do this. I want to make sure that we can see all of those prices and scrunch the chart down. Down here below, you can see we gave ourselves a lot more room to the downside. On the topside, we’re limiting ourselves to 55, primarily where the stock opened back up yesterday or where it closed yesterday before earnings.

We’re assuming now that it’s had earnings, earnings were obviously not so good, the stock may continue to drift lower. We gave ourselves more room to the downside to being able to do that, but still trying to take advantage of this high implied volatility that we still see even after earnings in Herbalife. When we go to the trade tab here of our position, you know exactly where it’s positioned probability wise.

On the downside, we have a 20% chance of going in the money at 30, and then on the topside, and this is a little bit different because the markets have already shifted towards the end of the day, but it’s about a 16% probability on the topside. And that’s interesting to me for two reasons. One, the topside is only about $10 away, so our call spread is only about $10 away but has a lower chance of actually hitting than the bottom side.

The bottom side is a little bit further away, it’s about $15 away, and you can see that that $15, even though it’s further away statistically has a better chance of hitting because of implied volatility and the trading history of HLF. I think it’s a fascinating trade, a good look at a skewed iron condor, definitely, one that you want to keep referencing back. And save this video and share it apparently online with other people.

Alright, the other trade that we got out of today… And these two trades naturally go together just because of the nature that they’re in. But the other trade that we got out of is OIH. We had sold the 47/48 call spread. The OIH trade was more of a hedge for our overall oil position, so we have a lot of bullish oil positions, and those obviously haven’t been doing well because the oil market is heading lower, so those have been losing money.

But we added some other positions in here to offset that and OIH was one of those trades. What we did today is we got rid of and bought back our OIH 47/48 credit call spread, we paid an $.8 debit for it, so we made $57, a nice little hedge, and then what we also did is went right back in and we’ve sold some COP which is Conoco Phillips, trying to mimic what we’re trying to do with OIH. OIH has run its course, it’s only got about $8 of premium left, so now we’re recycling the trading and making the same type of trade, just in a different area of the market.

With Conoco Phillips, we decided to sell the December 72.5/75 call spread for a $.45 credit trying to hedge some of our long oil positions that we currently have. And if oil does continue lower, we want to offset those losses with some of these profits on things like Conoco Phillips and OIH. When we go the chart here of COP, you can see that implied volatility is still very, very high and we did have a nice little dip today down with oil prices.

But implied volatility is still very, very high and we are now past earnings, so that doesn’t become a factor. This is why I like this trade, very liquid stock, high probability trade, great implied volatility, and now we’re beyond earnings, so we don't have to worry about the embedded risk that earnings carry with trading something like a regular stock versus an ETF in OIH.

Those are the four trades that we made today. That's pretty much it. As always, if you guys have any comments or questions, please add them right below. And if you're watching this video on YouTube or somewhere else online, you just have to understand that you're getting this video and looking at these trades about 15 days after they're sent out to our members.

If you want trades like this and alerts and this video the same day that the trades are made, 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. 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 two daughters.