What happened Friday? Patience is in order before entering the SPY Iron Condor for May.
Before I outline the suggested setup for the Iron Condor entry for May, it is worth posting the SPY 6 month chart at the close Friday:
SPY 6 month chart:
SPY closed Friday at 186.40, down 1.2% from Thursday's close. All the major indices dropped dramatically; dragging the ETF's down with the pack. The sharp sell-off could be a reaction to the monthly jobs report; March Nonfarm Payrolls rose +192,000 compared to consensus estimates of +200,000. This perfect "Goldilocks" number, along with the upward revisions to previous months, may be a signal to accelerate the QE tapering.
The original entry plan for the SPY May Iron Condor was around 39 days prior to expiration. However, I do believe patience is in order with such a big move Friday. I would not want to enter a new, non-directional trade strategy such as the Iron Condor until I see how things settle in the next few days. I will enter a position sometime next week, following the same guidelines as last month.
For those of you who may not have been following the monthly Iron Condor, a summary of the trade entry is as follows:
- Sell a short strike with a delta in the .15 - .20 range.
- Buy a long strike 5 points away from the short strike.
- Minimum credit (for both sides) should be at least .80, or it is not recommended to enter the position.
- Target gain is 10% of the actual margin/risk. This is calculated by the width of the wings (5 point in this case = $500), less the actual credit received. For a one-contract trade using the minimum credit of $.80, the margin/risk is $420. Target gain in this example is $42.
- Max loss is 15% of the margin, or $63 using this same example.
- This position will be traded as a "no touch"; it will remain open as long as SPY remains between the short strikes, until the garget gain is reached. The position will be exited at either short strike or the pre-set 15% max loss.
Having said that, it is a traderâ€™s individual decision whether to wait for target gain, or max loss, on any position. Trading is a blend of oneâ€™s individual style, risk tolerance, and intuition. This combination can help reach your annual trade plan results. I recommend following your own trade style; there is nothing wrong with exiting a position early. Remember, trading is an art, not a science.
I will post entry details next when the position is opened.
As always, trade carefully, practice patience, and stay keen on your risk management.