[Options] They Are Only "Semi" Scared

Sean McLaughlin
January 19, 2022

While the US Stock Market has pulled back a bit this week, we've seen $VIX pop its head back up above 23 and print its highest levels in a month. And this isn't entirely surprising given that the highly watched Russell 2000 $IWM has been struggling to hold on to its yearlong support level of around 210.

But has the "all-clear" signal for the bears fired? Is it time to pile in short? We're not convinced yet.

Meanwhile, we've seen some pullbacks in semiconductors stocks we own ($NVDA and $MU most notably) that may get us stopped out soon. But when we zoom out to the bigger picture, as seen via the $SMH Semiconductors ETF, we see that we've been in a range for quite some time now. And even if we'd lose the support of this recent consolidation range at around 290, we can expect the 270-275 zone to offer a new level of support:

With implied volatility driving options prices higher in $SMH options, this sets up a good candidate for a delta-neutral credit spread.

Here's the Play:

I like an $SMH March 265/270/320/325 Iron Condor for an approximately $2.15 credit. This means we'll be short 270 puts and 320 calls, while protecting our position $5 away on both sides with long 265 puts and long 325 calls. We'll be doing the same number of contracts at all four strikes to keep the risk even:

The most we can lose in this spread in a worst-case scenario is $2.85. And this only happens if $SMH rips back to new all-time highs or breaks below $265 and closes there at expiration.

But I have no plans on holding it all the way to expiration.

I'll take my profits and close the trade down when I can buy back the entire spread for a $1.00 debit. This would represent a capture of a little bit more than 50% of the original premium collected at trade initiation. This is a Best Practice I always adhere to with Iron Condors. I'm not trying to be greedy in keeping all the premium, I'm trying to be opportunistic in fading the recent volatility premium pop. Let somebody else sweat the gamma risk heading into expiration.

As for defense, my plan is simple: Any $SMH close below 270 or above 320 (my short strikes), invalidates my thesis and I'll have no desire to wrestle with the position. I'll then close the entire spread down -- win or lose -- and move on to the next idea.

Look for me and JC on Twitter around 2pm ET today. We'll be live streaming and chatting about this trade more in-depth.

If you have any questions on this trade, please send them here.

ASO subscribers who missed last week’s live Jam Session can catch it here.

~ @chicagosean

P.S. We do trades like this regularly. If you'd like to leverage Best-in-Class technical analysis into smarter directional options trades, try out All Star Options Risk Free! Or give us a call to learn more: 323-421-7991.

 

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