It sure doesn’t “feel” right to enter into a new income trade here, does it?
After all, the market basically had a slow motion crash lower, where the S&P moved over 200 points in the course of a month.
However, from my experience… after large trending volatility movements that is often the best time to enter into new iron condors.
My opinion is that the biggest risk is to the upside on an iron condor trade. This is because of the option skew as it allows us to select further out of the money strikes compared to the call side.
Because of this, we will be going half size on the call side.
Here is the trade:
Sell to Open March 1690/1680 Bull Put Spread @1.10 or higher
Sell to open HALF SIZE March 2000/2010 Call Spread @1.75 or higher
Initial credit will be 3.95, for every 2 put spreads and 1 call spread. Anything down to 3.70 is a good price.
The alternative trade would be to simply put on the 2000/2005 as it would give you the equivalent trade.
Here is the game plan:
If the SPX breaks under 1780, then buy some put spreads to cut delta. Specifically, it will be the SPX April 40 delta / 20 delta put spread. I’m not sure what the strikes will be but that is the structure. If the market sells off, then close the hedge for a profit and roll the put spread down, then sell another round of call spreads.
If the SPX moves above 1960, then roll the call spread higher by 30 handles and double size. If the market continues to squeeze back above 2000, then buy some calls as a hedge to cut delta. Then if the market squeezes any more, close the call hedge and use those profits to roll the call spread higher, and then roll the put spread higher as well.
Update – February 24, 2016
This position has captured 60% of max premium with a month to go. It’s time to take the position off.
Buy to close SPX March 1690/1680 put spread @0.40
Buy to close SPX March 2000/2010 call spread @0.80
10 Put Spreads sold at 1.05. Closed at 0.40. Profit: $650
5 call spreads sold at 1.90. Closed at 0.80. Profit: $550
Total profit: $1,200