With the VIX now below 19, it's critical that we keep it in mind that another volatility expansion is likely on the horizon, which means most option values will go up.
For this reason increasing the cash balance to over 50% is highly recommended otherwise option traders can easily get caught off-guard.
Given that the market is going through a fairly substantial and rapid rally, I was looking for opportunities to sell call options. What makes this challenging at the moment is the fact that many of the stocks have fallen a lot in the past two months and this rally is just helping them to bounce back a bit.
To add to the complexity, the earnings season is about to kick off and I expect significant price movements. For example, stocks like Netflix (NFLX), Meta (FB), PayPal (PYPL) have all dropped huge. It will be interesting to see where they are going to go after earnings. Frankly speaking, my intuition says that they will go up as losing 45% value seemed like a massive overreaction to me.
So what's my trade today?
Considering that I was not comfortable with any of the companies I checked as potential call option prospects, I decided to go super conservative on #NFLX ( #Netflix ) with an Iron Condor.
An Iron Condor is a put vertical and a call vertical combined: sell a put option and buy a put option with a lower strike plus sell a call option and buy a call option at a higher strike. This way the max loss is limited (defined risk strategy).
I am completely neutral on this stock, which means I don't have any predictions whether it's going to go up or down. The volatility is pretty high but when we sell an iron condor then it doesn't matter much.
The stats
Trade Type: Short Iron Condor
Strike: $330/335 - 455/460
Expiry: 20 May
Delta: 0
IV Rank: 57.3
Premium: $1.52
Cap Req: $348
Annualised Prof at Expiry: 307%
So I sold the May $355 put and bought the May $330 put plus I sold the $455 call and bought the $460 call.
If the stock remains between $355 and $455 then this trade will be profitable.
Let me know your thoughts.
This is a big loser.
Also, it's the first loss out of the 60+ trades that I have been documenting in this forum.
Closed at $5 for an annualised loss of 702%.
So let's put this into perspective:
It was a risk defined strategy so the loss was $3.48.
The price stopped at $186!
It was at $391 when I set up the trade.
In fact, it was at $618 in the beginning of this year.
This fall is as bad as it gets. So, for me to get out of it by losing $3.48 is actually a massive blessing as it could have wiped me out if I went naked with this trade.
Also worth noting that this loss was well offset by the wins on some of my other trades:
https://www.tycoonitos.com/community/market-comments/market-comments-20220520
This stock was absolutely annulated so at the moment the only thing we can do is to lower our losses by rolling down the call side. However, I want to wait with it for a bit as I expect the stock to bounce back a bit.