SPY ETF Trade Setup
We are opening a January expiration SPY Iron Condor. The next step is to figure out which strike prices will let us collect the most option premium AND minimize the risk of losing money.
SPY closed at $110.64 on Thursday (36 days to expiration)
SPY is priced at its current 14-day EMA (see SPY chart down below)
SPY is trading ABOVE its 20-day Bollinger Band SMA, and 50-day simple moving average (see SPY chart)
SPY is well ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is neutral (See Spy chart)
Moving Average Convergence/Divergence (MACD) is giving a bearish signal (See Spy chart)

30 day Historical Volatility is 18.58%, Implied Volatility is higher at 20.68%. The difference is that Implied Volatility is one of the components used in option pricing, while Historical Volatility measures actual volatility that occurred during the past 30 days - both volatility numbers are near 52 week lows, which is considered bullish
Upper range standard deviation is .84162, the lower range is -.84162.
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration (allowing us to keep most of the money we collected)!

We want the SPY Bear Call spread short strike to exceed defined resistance levels :
$112 calculated based on previous intraday highs and technical resistance levels
$115 equals the upper price level of our 80% statistical probability range
$114 is the upper level of the Bollinger Band – Solid purple line in the SPY chart below

The Bull Put spread short strike price should be below defined support levels :
$103 calculated based on previous intraday lows and technical support levels
$104 equals the lower price level of our 80% statistical probability range
$105 is the lower Bollinger Band level – Solid purple line in the SPY chart below

We want the SPY Iron Condor to generate a minimum .50 net credit on each leg AND we prefer that the short strikes fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium). The spread in tables below comply with our trading rules for initiating the January option expiration month SPY Iron Condor (based on Thursday's closing prices). The recommendation is to submit a limit order to purchase/sell the option strikes prices below.

Premium Credit $1.165
Total Option Premium Received $2,330 (Excludes commissions and fees)
Maximum Risk $7,670
Margin Requirement $10,000
20 contracts traded on each leg (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

DIA ETF Trade Setup
Also we are opening January expiration DIA Iron Condor.
DIA closed at $104.18 on Thursday (36 days to expiration)
DIA is priced ABOVE its current 14-day EMA (see DIA chart down below)
DIA is trading ABOVE its 20-day Bollinger Band SMA, and 50-day simple moving average (see DIA chart)
DIA is well ABOVE its 200-day simple moving average (see DIA chart)
Relative Strength Indicator (RSI) is turning bullish (See DIA chart)
Moving Average Convergence/Divergence (MACD) is bearish (See DIA chart)

30 day Historical Volatility is 16.35%, Implied Volatility is higher at 18.67% - both volatility numbers are near 52 week lows, which is considered bullish
Upper range standard deviation is .84162, the lower range is -.84162.
Use the number of days to expiration, volatility number and the standard deviation to calculate the 80% statistical probability for the option price to close within our short strikes at expiration.

We want the DIA Bear Call spread short strike to exceed defined resistance levels :
$106 calculated based on previous intraday highs and technical resistance levels
$108 equals the upper price level of our 80% statistical probability range
$107 is the upper level of the Bollinger Band – Solid purple line in the DIA chart below

The Bull Put spread short strike price should be below defined support levels :
$97 calculated based on previous intraday lows and technical support levels
$98 equals the lower price level of our 80% statistical probability range
$98 is the lower Bollinger Band level – Solid purple line in the DIA chart below

We want the DIA Iron Condor to generate a minimum .50 net credit on each leg AND we prefer that the short strikes fit our statistical probability profile (80% chance all the options will expire worthless and we get to keep most of the sold premium). The spread in tables below comply with our trading rules for initiating the January option expiration month DIA Iron Condor (based on Thursday's closing prices). The recommendation is to submit a limit order to purchase/sell the option strikes prices below.

Premium Credit $1.12
Total Option Premium Received $1,673 (Excludes commissions and fees)
Maximum Risk $8,828
Margin Requirement $10,500
15 contracts traded on each leg (number of contracts can be increased or decreased based on risk tolerance and/or funds available to trade; this will impact Total Premium Received, Maximum Risk amount, and Margin Required)

Exit Plan
As with initiating the trade, the decision process for exiting our Iron Condor positions will be simple:

Anytime the market maker is willing to accept a limit price of less than .11 on one of our short strikes, buy back all the short contracts and sell the long positions on the same spread. However, if it is a few days prior to the expiration date, we may be able to hold out for a .05 bid.

If one of our short strikes is penetrated (closing price above our short call or below the short put) AND the delta rises to .65 we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another short strike price. Unless this is option expiration week, do not panic and rush to close the trade, many times the market will reverse itself and remove the sense of urgency. If one of our short strikes has been violated and there is no price reversal, we cut our losses and live to fight another day.

We are opening both Iron Condor positions (SPY and DIA) as separate orders with four legs each. Exiting these positions prior to expiration we will probably “leg out” of each trade by first unwinding either the bear call spread or the bull put spread; and close out the other side of the spread as a separate order. The timing of closing out each side of the Iron Condor is dependent on following our Exit Rules described above.

Final comment
As discussed in the past, we will reiterate once again that for this particular trading strategy, the primary object is not to get hung up on trying to predict where the market will be in the future. Our primary focus should be to just listen to and understand what the market is telling us right now and manage our risk accordingly. Whichever direction the market goes we have a ready exit and are planning our next move!

Gregory Clay

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Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.