Next week I’m going to focus on short term iron condors. I will be structuring these Iron condors to have a slight directional bias by selling near the money and selling further out of the money options for the side I’m anticipating the market to move. My hard stops will be the midpoints of each vertical spread. I will look to take profits or a small loss upon a underlying price touch of the further out of the money short option strike or the midpoint of the vertical spread opposite to my directional outlook, respectively.
I have fairly well defined rules for entries, targets, and stops for various directional trading strategies, but have been feeling a bit lost in how to best structure defined risk option trades. I will be structuring iron condors according to chart support resistance levels of the underlying and expected volatility.
Versus out of the money directional butterflies, this iron condor structure will see theta become more of an overall contributor of profits as seen by a tighter theta to delta ratio, at the cost of gamma/convexity, of course. My probability of profit will increase at the cost of maximum potential returns. In practice, my directional butterflies rarely saw a body touch, so I’m not really giving up much as far as potential returns. Part of this may be bad trading, but the other part is a changed outlook resulting in earlier trade closure than initially anticipated.
Another factor to consider with iron condors versus directional butterflies is lower leverage, but my utilization of account equity has been very low, making this a current non consideration. For certain trade ideas, directional butterflies will still be used, as well as naked long options on trade ideas of short term price range expansion.
As far as order execution strategy is concerned, I will always fight for each tick of price improvement, especially since the net delta of the iron condor will be low. However, unhedged legging in to an iron condor can be too expensive for a tick. While working orders, I may maintain near equivalent desired delta exposure in the underlying, and close out that exposure when my Iron condor order is filled.
I will post some live trade ideas as time during my workday allows.
For next week, I will be looking at the following ideas:
Reversion to mean ideas - AUD, BRR, ZN, HG(Need to consider limit up risk) like seen on LB, ECH, CSX, FB, and DE.
Trend continuation ideas - CL, MXP, GC, SI, AAPL, V, MA, and FDX.
Some of the above trade ideas are seemingly mutually exclusive with one another. Asset class relationships seem to be changing, perhaps related to the increasingly upward push in interest rates and, or increasing anticipation of Federal Reserve policy changes. Investor demand of carrying charge, long term storable commodities, such as gold and silver, may be, or will be affected by rising interest rates. I wonder how much precious metal demand is being affected by current strong cryptocurrency demand? If, or when, the SHTF, the direct physical possession of metal will likely trump cryptocurrencies, as one needs a computer they don’t fully have control over, software they don’t own, and internet access, which is subject to its own issues for maintaining cryptocurrency holdings. In other words, government intervention into cryptocurrencies is easier than many would like to believe. However, we likely have years to go before the preceding scenario, if ever, takes hold.
ES volatility is at or near levels that may reward long vega option strategies. Historically, though, relatively low volatilities can remain in place for a long time. However, very active retail participation and potential unwinding of hedges related to options market making may suggest this market is not ready for a nap. Perhaps even when Summer rolls around.
