For several months, we enjoyed 100-point range-bound trading between 204 and 214, but 204 has now been blown, so now where is this thing likely going to go? As a premium seller, I don't in fact care all that much, as long as price stays between my short strikes for the duration of the contract. That being said, it was awfully nice to trade the top at 214 with short call verticals at or above that strike and to rely, to a certain extent, on the fact that there was a fairly clean floor to trade short put verticals or to initiate iron condors with a floor at or below 204. Now, however, all that is out the window, and I consequently have to resort to Black-Scholes to tell me the breadth of the expected move and where the 1 SD is This is because I have virtually no clue where this thing will go, at least until things sort themselves out on the Daily chart from a price action perspective: Is 1871 is the new lower low? Is 1992 the new lower high? Are we just plain whipping around?
At this moment in time, modelling places the expected range of movement between the 189 and 210 strikes for the next 45 days or so, with the 1 SD lines being at 181 and 218 strikes, and we are virtually smack dab in the middle of the range from the October 2014 low to the 2015 high (the .50 Fib is at 1974), which I view as quite workable from an iron condor perspective. Here's an example of a fairly delta neutral IC setup in SPY with the short call end of things placed at the edge of the expected range of movement and the short put side placed at the 1 SD:
EXAMPLE:
Oct 16 178/181/210/213 SPY IC
Max Profit/Buying Power Effect: .88 credit/contract; 2.12/contract
POP: 59%
Delta: -4.64
Notes: I have previously shown "Max Profit" and "Max Loss" figures for the setup. However, I think describing things as a potential "Max Loss" is inaccurate in the vast majority of circumstances, since a "Max Loss" implies that you do nothing at all in the event that a side is breached, and you allow the setup to go to max loss at expiration -- something I never do with index ETF trades. Faced with a breach of a side of an IC, I almost always roll the breached side out for duration and credit and attempt to improve the strike prices if possible in that scenario. Consequently, the "max loss" is, in fact, never realized.
At this moment in time, modelling places the expected range of movement between the 189 and 210 strikes for the next 45 days or so, with the 1 SD lines being at 181 and 218 strikes, and we are virtually smack dab in the middle of the range from the October 2014 low to the 2015 high (the .50 Fib is at 1974), which I view as quite workable from an iron condor perspective. Here's an example of a fairly delta neutral IC setup in SPY with the short call end of things placed at the edge of the expected range of movement and the short put side placed at the 1 SD:
EXAMPLE:
Oct 16 178/181/210/213 SPY IC
Max Profit/Buying Power Effect: .88 credit/contract; 2.12/contract
POP: 59%
Delta: -4.64
Notes: I have previously shown "Max Profit" and "Max Loss" figures for the setup. However, I think describing things as a potential "Max Loss" is inaccurate in the vast majority of circumstances, since a "Max Loss" implies that you do nothing at all in the event that a side is breached, and you allow the setup to go to max loss at expiration -- something I never do with index ETF trades. Faced with a breach of a side of an IC, I almost always roll the breached side out for duration and credit and attempt to improve the strike prices if possible in that scenario. Consequently, the "max loss" is, in fact, never realized.