[Options] Settle In For The Chop

Sean McLaughlin
January 23, 2019

Tuesday was only one day but it felt like it may have offered us a clue. The major indices — S&P 500, NASDAQ, Dow, Russell 2000 — all experienced notable pullbacks. Perhaps the first notable pullbacks we’ve seen in at least two weeks.

Now does this mean we picked the top and we’re about to run back down towards the bottom? Of course not. What this likely signals is that we are about to set into a little choppy-churn range for the next month or two.

Of all the largest ETFs I track with liquid options, the one with the highest relative volatility coupled with range-bound trading activity is $QQQ -- the NASDAQ ETF. Recent trading action has taken us right back near the middle of its 90 day trading range. Yes, it basically v-bottomed back into the middle of the range, but that’s OK. This might be the perfect time for this index to take a rest. Meanwhile, volatilities have receded a bit but are still elevated compared to most of last year.

Here's the Play:

When my forecast is for range-bound trading activity, my go-to strategy is an Iron Condor. As such we are going to put on a March Iron Condor in QQQ selling the 171 call and the 152 put, while buying protection with the 181 call and the 133 put. We hope to get a net credit somewhere in the range of $3.30 to $3.40. This position will require approximately $1600 in margin per one-lot.

The short strikes in this spread were chosen because I like to sell the 25 delta options, and the long option strikes were chosen because I like to use the five delta options as protective hedges. Net net at initiation, the position delta in this trade will be approximately zero when we start out.

As always I’ll look to cover the spread when I can buy it back for half the value of the credit I received when I put the trade on. So if we get $3.40 to put the trade on, I'll close it when sitting on at least $1.70 in profits.

Due to the tenuousness of the market right now, I’m of the mind that this position will not be managed and instead I will completely take it off if either the short call or the short put strikes are breached. What I’ll be doing is if any time QQQ closes above 171 or below 152 I will completely close the trade down on the next trading day. If that happens, that tells me the market is not yet ready to settle down and being short an Iron Condor is a bad play.

If you have any questions about this trade or how I handle Iron Condors in general please, email me here.

~ @chicagosean

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