Combat Options Trade on SPX: Firing Line

Here is a short iron condor trade on SPX.
By Matthew "Whiz" Buckley ,

As end of year rapidly approaches, there's uncertainty creeping into the market such as the extension of the tax cuts (or not), unemployment, Europe, China, and Santa Claus.

At Fox3 Options we're looking into a potential trade on SPX. To see this potential trade in a video presented by

CNBC

's "Fast Money" TV show contributor Jared Levy, click

here

.

Strategic mindset: We're neutral on SPX with a quiet week ahead as far as financial data and think SPX may remain range bound, and suffer a volatility crush into December expiration.

Target: SPX trading at 1221

Commit Criteria: Friday's PMI and employment numbers should be the largest event/catalysts for at least the next 10 days. Based on technicals, we're looking for the SPX to stay within a 90-point range of 1170 and 1260.

Tactic: Short Iron Condor (credit)

My tactic for this trade is a short iron condor. Short iron condors will always generate a credit. We are selling the inner strikes and buying the outers: December 1160/1170 puts - 1260/1270 calls.

This strategy prefers a range bound underlying to stay within the inner strikes. We would prefer the SPX to stay between 1170 and 1260 by December expiration. We also WANT volatility to decrease if SPX is in between 1170 and 1260. Decay should accelerate in the last week of the spread.

Tactical Employment

  • Buy to open 10 December 1160 puts
  • Sell to open 10 December 1170 puts
  • Sell to open 10 December 1260 calls
  • Buy to open 10 December 1270 calls
  • As a spread for a net credit of $1.95 (or more)
  • Max risk per spread = $8.05
  • Max profit = 1.95 per share; $195 per spread
  • Break evens = $1168.05, $1271.95

Here's how the tactic is employed: We'll enter the iron condor spread by buying the December 1160 put and selling the December 1170 put; simultaneously we will be trading the same amount of the calls by purchasing the December 1270 calls and selling the December 1260 calls as a spread for a net credit of $1.95 or better. If the stock moves lower or higher sharply, our position will suffer, as one or the other credit spreads may gain value. Our goal is to have the SPX anywhere in between the inner strikes on December expiration.

Mid-course guidance: We will monitor the trade for changes in price and this trade is nice because it shouldn't decrease in value quickly unless the stock makes a dramatic move, at which point we will evaluate whether or not to hold the position.

An acceptable target would be if we can buy back the iron condor for $.95, Time decay will help us and we have a bearish sentiment on volatility. The main goal here is to have the position until expiration or capture at least $1.00 of profit.

Eject Criteria

A $5.00 loss maximum, which would mean having to close the spread for $6.95 debit. So if the spread increases in value to that point, then we'll consider closing the spread if it still doesn't seem like SPX is going to revert.

Iron condors like this one should not have volatile drawdown's in value, but will be limited in upside. We will most likely not be able to get the max profit of $1.95 until closer to expiration and if SPX is near its current level. We will close the trade if our commit criteria changes. We will close the trade if SPX eclipses the short inner strikes and we will use limit orders to "protect our 6," to use a fighter pilot term.

Profit Goal

Preferably we would like to get the max profit of $1.95 out of this trade and that will generally not occur until expiration, so the ultimate goal here is to try and squeeze a minimum of $1.00 out of the trade. This means closing the spread for a $.95 or less debit upon closing. Place a limit GTC order to buy back the spread at $.95 and leave it there as a 'wish' order.

This is an elevated probability trade, which is why we are making some sacrifice on risk.

Exit

  • Sell to close 10 December 1160 puts
  • Buy to close 10 December 1170 puts
  • Buy to close 10 December 1260 calls
  • Sell to close 10 December 1270 calls
  • As a spread for a net debit of $.95 or less
  • We may also let the options expire and save money

Firing line: With all the uncertainly we discussed leading to the selection of this target, we feel that this potential trade could provide a nice opportunity to potentially profit from a range bound SPX. You can watch the trade

here

http://www.fox3options.com/2010-12-trade-alert and also let us know what you think in the comment section. Have a great weekend, happy hunting and make sure you hedge!

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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