Why We Place This Skewed Iron Condor in EFA?

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Iron condor: In tonight's video we're going to go through, the one opening trade that we had in EFA and then also the adjustment that we had in FXI.

So those of you who are Elite members now because we talked about this on the strategy call last night on Sunday, but we had talked about this adjustment that we could possibly make to FXI just depending on where the ETF opened today and kind of all the news that's surrounding Greece and everything else over in Europe and how the markets are reacting to that.

So FXI opened just marginally higher and pretty much stayed there all day long, so towards the end of the day what we decided to do is add this adjustment trade to FXI where were selling just a five dollar wide put vertical spread against our current position. 

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Now this isn't a rolling position we're not rolling anything up from lower prices were just simply adding put credit spread to the position to increase our overall credit in the entire trade and again, helps hopefully reduce some of the risk in the trade wherever FXI ends up landing.

So here's where the stock is actually right now you see with all the news that's happened implied volatility has dropped like a rock that's helping out really good for some of the positions that we have in August and a lot of these different securities so you can see IVs dropped form almost the hundredth percentile just four days ago, to now down to the fifty-eighth percentile, so it is dropping dramatically and very very fast.

As a result, the stock has just been in a little bit of a bounce mode but has stayed pretty stable over the last couple of days. What we're trying to do here is just add another position below where the stock currently is to again reduce some exposure.

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So this is our current position pre-adjustment here we've got this stair step looking iron condor going in to FXI and what we wanted to do is again just reduce some of the expose that we have to this side of the trade. Or what if FXI were to continue to head higher so again, what we did is we sold the 42 38 put spread.

So we sold the 42 options which are right here, and we bought the 38 options which are right here and now you can see how this again just adjusts our profit loss diagram here just a little bit and helps reduce some of that exposure in the middle of the graph now, if FXI actually moves down a little bit over the next couple of days as we head towards expiration.

It's actually a good thing if it does higher than here then we just continue to be at basically the same rate or pace that we're at right now with pricing we don't really lose anything we don't really gain anything so we actually want just a very slight move down in FXI for us to actually see a nice little return on this particular trade.

So the other trade that we entered today is an iron condor in EFA, and this is another position that was getting back into we had a nice profitable trade in this earlier this month as the markets were falling away, we traded call credit spread against it the markets fell EFA dropped that allowed us to take a quick profit in that so now we're re-engaging here with EFA now one thing you'll notice.

And I think I just made a typo error when I sent this out in the alert, but one thing you'll notice is that the out spread side is 10 dollars apart, so we dong this iron butterfly where we have our short strikes right at 64 and then we're buying protection either end on the way out now you'll notice that on the put side the put are about 10 dollars apart.

So they're spaced out pretty well because put pricing is just a little bit more expensive on the call side I think I actually said in the alert it was five dollars, but it's actually about seven dollars wide. So you can see we sold the 64s and bought the 71 calls above it, and you can see it's not equal now that wasn't by some magical design that it just ended up happening that way we did that on purpose.

I want to show you why we made the call side just a little bit more narrow than the put side and it all has to do with option pricing. So let's bring up a trade tab here of EFA so we can just look through a little bit of the option pricing right now. All right, so we're going to go out to August because we did the August position and you can see we just slightly skewed this thing a little bit lower.

We can use a couple more bearish positions so it's just very slight skew the stocks trading about 64 54. So we based everything right around 64 again. You can choose 64 or 65 it really doesn't matter but you can see that when we went out 10 dollars on the bottom end down to the 54s, that price of that option was at the time around 10 bucks.

Okay so you can see that we paid about 10 dollars to get some protection and it was an equal distance out about 01 dollars out which is what kind of our normal standard trading system entails. Now on the call side we still sold the 64 calls but if we had gone 10 dollars out all the way to the 74s they're practically worthless and they don't have a lot of volume in open interest.

So, even though we're buying options we're not really intending that these things are going to be worth a lot of money we're not, hoping that the market goes completely higher than here we just realize that at the time and this is probably to as accurate because the market's closed, but at the time these were trading for about a penny to two cents.

So it really didn't serve us any purpose to go that far out of the money just for the sake of making this trade balanced and equal 10 dollars out on either end, we're only buying protection for a penny here we spent almost 10 dollars, why not come in just a little bit closer and spend a little bit more money so we ended up coming into the 71 calls and ended up spending about four dollars on these calls not dramatically more.

But you can see that we were able to just for a couple of dollars reduce a bunch of our upside risk in this trade and again this is just us trying to to be a little bit flexible with some of the position and entry. So that's the one key takeaway for tonight really. Look at your pricing when you're starting to build these trades so don't automatically assume that you can just sell here.

And then but 10 dollars out on either end and that everything's going to be equal and symmetric, it may end up turning out that sometimes the put sides are really cheap and you can come in closer, or sometimes the call side's really expensive, and you can come in a little bit closer, go out a little bit further so really look at that pricing and ask yourself what are you getting for that.

In our case we got three strikes closer, on the call side and it only cost up three dollars more to do that, so when we actually look at the profit loss diagram here for EFA, you can see that we are definitely looking like a broken wing iron condor here because we have so much less risk to the top side should EFA continue to move higher.

We'll see if that actually plays out or nor but you can see, because the strike width is much shorter out here 64 to 71 we have dramatically less risk on this side of the trade than we do on the bottom side, okay and that's okay we're okay taking that risk we just have to be aware that we have a bit more risk on the bottom side in case EFA continue to move lower okay.

So as always hope you guys enjoyed these videos if you have any comments or questions please add them right below in the comment section 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.