The Bottom Line:
- Setting up and managing short-term iron condor spreads on Cisco, Copa, and Sociedad Quimica
- Utilizing paperMoney feature on the thinkorswim platform to walk through trade nuances
- Strategy to capture volatility crush post-earnings through option selling and buying
- Considerations for selecting strikes, expirations, and managing trade exits
- Risks and rewards associated with iron condor trades for maximizing profits
Setting Up Short-term Iron Condor Spreads on Key Stocks
Setting Up Short-term Iron Condor Spreads on Key Stocks
Hey traders, on this episode of Tradecraft I’m going to show you how I set up and managed a couple of hypothetical, very short-term iron condor spreads on Cisco, Copa, and Sociedad Quimica using the paperMoney® feature on the thinkorswim® platform. I’m going to walk you through the nuances of my thought process, including why this could be a strategy used for trying to capture the volatility crush that often comes after an earnings report…
My goal was to try to profit from the change in volatility by selling an iron condor for a credit and buying the spread back when it’s worth a lot less, pocketing the difference, after fees…
Remember that the short options drive the trade because of the credit from the larger premiums. If implied volatility falls, the value of the premiums will shrink. So, if I buy back the options later, I’ll get to keep more of the initial credit. Additionally, short options also benefit from time decay…
I used the expiration’s implied volatility to help me because it provides an idea of how much the market thinks the stock is going to rise or fall after the announcement. In this case, it’s plus or minus $2.40. The tool doesn’t give a direction, just an idea of how much of a move is reflected in the price of the options…
Using thinkorswim Platform to Navigate Trade Nuances
Using thinkorswim Platform to Implement Trade Strategies
Another important risk to understand is if the stock price closes between the long and short strike prices at expiration. If that happens, I’ll likely be assigned on a short strike. If it’s the call, I’ll need to deliver 100 shares of stock, which would put me in an unanticipated short position. The long call won’t help because it’ll have expired worthless. That makes me subject to unlimited risk if the stock rallies…
In this case, it was forecasting $2.33 in either direction. The second tool is the at-the-money straddle for the front month. I saw this by changing the Spread to Straddle. The 53-straddle had a mid price, which is the halfway point between the bid and ask, of about $2.42. So, these tools gave me a range of $2.33 to $2.42…
Maximizing Profit Potential with Iron Condor Strategies
So, the theoretical max profit is about $35, which I’d get if the stock price stays between the short strikes at $50 and $55. But I do have some extra space between the strikes to eke out some smaller gains, as well as break-even points too. These spaces slightly increase my likelihood of getting some profit. The theoretical max loss is about $65, which occurs if the stock price falls below $49 or goes above $56…
The theoretical max gain was about $35, which could be achieved if the stock’s price stayed between $80 and $100. The theoretical max loss was about $450 and occurred if the stock’s price fell below $75 or spiked above $105. The risk to reward is quite large, but I do have a range of $20 for the stock to stay within, so the probability of success is relatively high…
Strategizing for Volatility Crush Post-Earnings
My goal was to try to profit from the change in volatility by selling an iron condor for a credit and buying the spread back when it’s worth a lot less, pocketing the difference, after fees…
Remember that the short options drive the trade because of the credit from the larger premiums. If implied volatility falls, the value of the premiums will shrink. So, if I buy back the options later, I’ll get to keep more of the initial credit. Additionally, short options also benefit from time decay…
Another important risk to understand is if the stock price closes between the long and short strike prices at expiration. If that happens, I’ll likely be assigned on a short strike. If it’s the call, I’ll need to deliver 100 shares of stock, which would put me in an unanticipated short position. The long call won’t help because it’ll have expired worthless. That makes me subject to unlimited risk if the stock rallies…
So, the theoretical max profit is about $35, which I’d get if the stock price stays between the short strikes at $50 and $55. But I do have some extra space between the strikes to eke out some smaller gains, as well as break-even points too. These spaces slightly increase my likelihood of getting some profit. The theoretical max loss is about $65, which occurs if the stock price falls below $49 or goes above $56…
The theoretical max gain was about $35, which could be achieved if the stock’s price stayed between $80 and $100. The theoretical max loss was about $450 and occurred if the stock’s price fell below $75 or spiked above $105. The risk to reward is quite large, but I do have a range of $20 for the stock to stay within, so the probability of success is relatively high…
Selecting Strikes, Expirations, and Trade Exits Wisely
Understanding Strike Selection and Risk Management
I found three companies that were set to report earnings on the same day. All three had high options liquidity with plenty of open interest and volume to hopefully lead to good pricing on the options contracts. The first was Cisco Systems (CSCO), which reported earnings on November 15 after the market close. Implied volatility tends to spike before an earnings announcement, especially in the front month options, due to uncertainty…
The next step was to select my strikes for the iron condor. It’s made up of four different strikes—a long and a short call and a long and a short put of the same expiration. Another way to think of it is that you have a vertical call spread and a vertical put spread at the same time. Because an iron condor is made up of four contracts, paying a fee for each contract in each leg of the strategy could be considerable. Consider these fees as you set up and close your trades…
Striking the Right Balance with Long Options
Of course, this only leads to a max gain if the underlying price stays between the short strikes. So, once I’ve chosen my short options, it’s time to select the long options. The long legs of the trade are farther out of the money because they’re there to limit potential losses in case the trade goes badly. The further out of the money, the cheaper the options, but the higher the maximum potential loss. Another important risk to understand is if the stock price closes between the long and short strike prices at expiration…
I went ahead and placed the trade. The next stock was Copa Holdings (CPA). It reported earnings the same day as Cisco. The 17 NOV 23 implied volatility was at 89.4% and was forecasting a move of about $6. The Market Maker Move was a little lower at $5.78. And the at-the-money straddle mid price was $5.65. The price of the stock when I was looking at this trade was $91, so I could’ve placed the short call strike at $97 or above and the put strike at $85 or below…
Analyzing Charts for Strategic Strike Decisions
So, the theoretical max profit is about $35, which I’d get if the stock price stays between the short strikes at $50 and $55. But I do have some extra space between the strikes to eke out some smaller gains, as well as break-even points too. These spaces slightly increase my likelihood of getting some profit. The theoretical max loss is about $65, which occurs if the stock price falls below $49 or goes above $56. When trading an iron condor, I’m weighing the reward, the risk, and the probability of success. Currently, I’m risking more than the potential reward. However, the price can rise or fall $3 in either direction and I could still make some profit, which I believe is a pretty good probability of success. Every trader must determine what numbers they’re most comfortable with. I went ahead and placed the trade…
Managing Risks and Rewards in Iron Condor Trades
Striking the Balance between Risk and Reward in Iron Condor Trades
Every trader must determine what numbers they’re most comfortable with. The price can rise or fall $3 in either direction, and I could still make some profit, which I believe is a pretty good probability of success. The risk to reward is quite large, but I do have a range of $20 for the stock to stay within, so the probability of success is relatively high.
Utilizing Long Options Strategically
The long legs of the trade are farther out of the money because they’re there to limit potential losses in case the trade goes badly. The further out of the money, the cheaper the options, but the higher the maximum potential loss. Another important risk to understand is if the stock price closes between the long and short strike prices at expiration.
Implementing Strategic Strike Decisions through Chart Analysis
So, these tools gave me a range of $2.33 to $2.42. With Cisco now trading at $53, I thought about putting the short call strike at 55.5 or higher and the short put strike at 50.5 or lower. However, I also wanted to look at the chart for some additional insight. The 90-day, one-hour chart for Cisco showed the stock was mostly moving sideways and implied volatility was near its high for the period.
