The October 18th Couch Potato published a November SPY call spread trade for the next day. We had to abort the trade as the following day stock prices pulled back significantly. Traders overreacted to the news about China raising its key bank lending rate and the third-quarter earnings news released that day. At this point Tuesday's action appears to only be a pause in stocks slow steady upward move. Yesterday and today stocks got back on track and prices recovered to recent highs. We will try the trade again, but instead of initiating only a call spread we are also planning doing a put spread to complete the iron condor position.
SPY ETF Trade Setup
We are opening a November expiration month SPY Iron Condor
SPY closed at $118.13 on Thursday (30 days to November expiration)
SPY is priced ABOVE its current 14-day EMA (see SPY chart down below)
SPY is ABOVE its 20-day Bollinger Band SMA (see SPY chart)
SPY is trading ABOVE its 50-day simple moving average (see SPY chart)
SPY is ABOVE its 200-day simple moving average (see SPY chart)
Relative Strength Indicator (RSI) is extremely bullish (See SPY chart)
Moving Average Convergence/Divergence (MACD) is bullish but losing momentum (See SPY chart)
30 day Historical Volatility is 12.59%, Implied Volatility is 18.20% both numbers have dropped near the bottom of their 52-week range â€“ which is considered a bullish sign
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 SPY Bear Call short strike to exceed defined resistance levels :
$118 calculated based on previous intraday highs and technical resistance levels
$122 equals the upper price level of our 80% statistical probability range
$119 is the upper level of the Bollinger Band â€“ Upper solid purple line in the SPY chart below
The Bull Put spread short strike price should be below defined support levels :
$114 calculated based on previous intraday lows and technical support levels
$113 equals the lower price level of our 80% statistical probability range
$113 is the lower Bollinger Band level â€“ Lower 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 call and put spreads in tables below comply with our trading rules for initiating the November expiration option series iron condor (based on Thursday's closing prices). The recommendation is to submit an order to purchase/sell the option strikes prices below. Please confirm the correct option symbols with your broker.
Premium Credit $1.13
Total Option Premium Received $2,260 (Excludes commissions and fees)
Maximum Risk $7,740
Margin Requirement $10,000
20 contracts traded (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)
The rules for exiting the November expiration SPY iron condor are:
Anytime the market maker is willing to accept a limit price of less than .11 on one of the short strikes, buy back all the short contracts and try to sell the long position 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 the short strike is penetrated (closing price above the sold call, or below the sold put) AND after market close, if the delta associated with one of the short strikes is .65 or higher, we will look to close out this spread (buy the short contracts, sell the long) and roll it out to another spread.
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.