The weekly SPX Iron Condor has been on a back burner since late last year; it's time to re-visit the strategy with slight modifications.
For those of you who have been following the newsletter for some time, you may be familiar with the weekly SPX 10-point wide Iron Condor that we traded for a period last year. This strategy was traded for 14 weeks; the average gain per week was 3.2%. This weekly trade was "put on a back burner" in October because of the relentless moves up, causing the call side of the position to be repeatedly threatened.
I have decided to put this weekly strategy back into the "test kitchen" to give readers another choice for a weekly trade. Depending on the test results over the next few weeks, I may begin to recommend/trade this with live capital. However, I will wait until the VIX rises to a level where we can get a better risk:reward on capital. It is not recommended to be trading it live at this point; I will be trading it in Paper Money, with slightly different management guidelines than the previous version.
The basic guidelines for this trade are:
Entry Day: Thursday or Friday for the next week's expiration cycle. As with our other weekly strategies, if SPX has moved +/- more than a one day, one standard deviation move, do not enter the trade until the movement is less than a standard deviation. If it remains over a one standard deviation, do not enter the trade. As of this writing, the one-day, one standard deviation move is 12 points.
Time of entry: Exact time is trader's choice; wait at least the first hour after the open before entering.
Trade entry: Sell short Call and short Put with delta of approximately 10. Buy long call and long put 10 points above and below short strikes.
Minimum Credit: Credit must be at least $1.25 to enter the trade
Maximum Risk/Margin: Width of wings less credit received. Using the example of the minimum credit of $1.25, the maximum risk would be $875 ($1,000 less $125). Some may view this as a very poor risk reward ratio, however, the short strike at a delta of 10 represents a 90% probability that the strike will expire out the money.
The graph below illustrates a sample position for the June 1 weekly cycle that I will use as an illustration for this article.
SPX Weekly Iron Condor Example
The strikes for this sample position are:
Calls: -1945/+1955. Delta of short call .08
Puts: -1870/+1860. Delta of short put -.10
Credit available as of today (Thursday, 8 days prior to expiration): $1.05. The minimum credit according to the guidelines is $1.25. The phrase "when the VIX is low, it's time to go" has been used over and over again, but worth mentioning here. Basically, at these low levels, it is very difficult for option premium sellers to obtain a fair premium for an acceptable risk in capital.
I would not enter this as a live position with the VIX at these lows; I personally do not feel it is worth the risk without getting at least $1.25.
VIX 6 Month Chart
I have modified the management guidelines slightly to be similar to the monthly SPY Iron Condor. This is being tested basically as a "no touch" strategy; keeping the position open until target gain is reached. The trade will be closed if the pre-set max loss is reached, or if SPX reaches either short strike.
Target gain: 10% of margin/risk.
Max loss: 15% of margin/risk.
In closing, I want to stress again that it is NOT recommended to place this trade live yet. This is, however, an excellent opportunity to backtest it or paper trade the strategy.
What is next for SPX now that it has moved strongly above resistance, closing yesterday at 1920?
The coming week brings several major economic news releases including:
- 10:00 am ISM Manufacturing Index
- 8:15 am ADP Employment Report
- 8:30 am International Trade
- 8:30 am Weekly Jobless Claims
- 8:30 am Monthly Non Farms Payroll
Without some geo-political news, SPX could drift around at these record-high levels; all eyes will be on Friday's employment situation report as the possible pivotal turning point in the market.
For those of you who follow/trade the weekly SPX Credit Spread, it is too early to determine if I will recommend or enter a trade for the June 2 cycle. I still caution putting on long positions at record highs. However, on the other hand, I am not ready to get in front of the market yet and sell calls. I will continue to sit on the sidelines until after the Non Farms Payroll report to see if I feel it is time to venture back into the weekly trade.
Looking ahead to the next monthly trade entry, I am planning to enter the SPY July Iron Condor sometime the week of June 9. Trade entry suggestions will be posted in next weekend's update.
As always, stay keen on your risk management and trade carefully,