SPX skewed Iron Condor for August

It took a while to convince me that the market is spinning its wheels and not ready to blast off or blow up in the next few weeks, but now that I’m convinced I put on the only trade that anyone would put on in a sideways market: the Iron Condor.

My underlying vehicle of choice is SPX, which is the cash-settled, European-style index that tracks the S&P 500. It’s big, it’s liquid and it’s cool. On the downside, they still use open outcry for this market, which means that suffering from slippage is just part of the game.

When constructing this spread, I had in mind that I’m gonna let it go for the full cycle. That means I’m going to exit the trade in 51 days and let the chips fall where they may, I’ll be able to handle it. Fifty-one days out for an Iron Condor is a little on the long-term side. I’m stretching my upper limit of 48 days that I typically apply to putting these spreads on, but I also have a good reason for doing so. July 4th weekend. Everyone is gearing up for the summer season with this long weekend, which I take to mean that nobody will be feverishly following the markets, at least nobody with serious capital to move it.

First step is setting up the spread: decide on the delta of the short strikes. Remember from the beginner’s guide to options you once read that at-the-money options have a delta of .50. So you’re gonna have to pick something under .50 but greater than zero. We could go into how the delta reflects the probability of expiring, but quite frankly I don’t buy any of those arguments and so I won’t bore you with Gaussian probabilities. Let’s just say that the lower the delta of the short strike, the less chance it has of being in-the-money at expiration.

It follows that if you have less chance of becoming in-the-money than your neighbor, you should get paid less, because you are taking on less risk, ostensibly. So keep this in mind. I chose to explore the world of 10 deltas on the put side and on the call side. That gives me a roughly 90% chance of staying out-of-the-money at expiration. Ooops, forget I said that. It gives me a pretty darn good shot at having my short option expire worthless. There, I feel better now.

With the 10 delta as our guide, we can easily identify the put side at the 790 strike and the call side at the 1010 strike. That’s where we start. Now we buy protection against the Black Swan events which rarely happens except last year when it rarely didn’t happen. We are going to buy calls and puts that are further out-of-the-money so we end up paying less for protection than what we receive for assuming risk. Normally, you pick equidistant strikes for protection on the put side and the call side, but this month I’m employing a little skew action. I’m worried about everyone waking up tomorrow and finding out that our market is worth a lot less than we’ve been led to believe. That leads to a selloff, which hurts the put side. So to give myself a little short delta bias, I’m putting the put side insurance only 5 points away, and the call side insurance 10 points away. The result, a 785/790 put vertical and a 1010/1020 call vertical.

This was marked at $1.30 credit when I constructed it. The SPX options have very large bid/ask spreads (I guess because the open outcry method needs to give shouting market makers a chance to take a drink of water). With this in mind, slippage is the cost of doing business. I put in an order for $1.25. Nothing. Okay fine, you can have another dime. Limit order of $1.15. Filled right away. Oh great, that didn’t feel right. Oh well, I’ve got my trade on for the summer doldrums.

The management of this trade is the easy part. Close your eyes until expiration and then look at your account balance. Hopefully, you get to keep the paltry $1.15 credit. Worse case you end up giving that money back and ponying up $8.85 of your hard-earned trading capital.


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