As we continue into another week, I wanted to talk about a strategy I haven’t discussed all that much. But it’s a favorite when it comes to the end of the week.
Why?
Because it uses theta decay to your advantage. And there’s no better time to take advantage of theta decay than when options are about to expire on a Friday.
So in preparation for that, here’s a case study involving a recent iron condor in AAPL…
Now if you’re in my Stacked Profits Mastery Program, you’ll recognize this trade because we took it (along with several others) during our live trading session on April 23rd.
Why AAPL?
For this particular type of trade, as I’ve said — this is going to be a theta decaying pinning position for a Friday expiration. For this type of trade, the best stocks to look at are the main FAANG stocks.
Why AAPL in particular?
It’s highly traded with a lot of volume in the options series. Plus, fun fact — it tends to get stuck around a certain price point when it comes to Friday expiration (something I’ve learned over the years while watching this stock). These are key factors when looking for a strong setup for a Friday pin.
What does a Friday pin mean? If you remember, I wrote more in-depth on this exact question in my recent letter “The Effects of COVID-19 on April Tech Earnings.” You can read more here.
But I’ll talk a little bit here in relation to this particular example.
It was close to Friday and there were a couple things going on:
- There was a key area of resistance
- The strike price was stuck in the middle
- And the Turbo VZO Indicator, which displays when a stock is stuck in consolation and trending lower or higher, showed promise
These 3 reasons are why I really dove into AAPL when I was looking to place a neutral theta decaying trade.
So what’s that actually look like?
To get a better view, it’s helpful to drop to a lower time frame chart, to see that the price is stuck. Now you need to determine what strike it might pin at. How do I determine what strike it might pin at? I look for high volume and high open interest.
When I was looking to set up this trade, I saw at the 290 strike high volume and high open interest as well as, at 300. That was much more obviously than any other levels! So on top of the 3 reasons I listed above, at the 280 strike there was a lot of volume and open interest.
With all of those reasons, I felt confident that AAPL was a solid setup for what I wanted, and here’s what happened…
As you can see, I got in for $3.41 and then what?
The way that premium works in the options market, is it decays over time. When premium is going to run out of time and options are gonna expire, it’s decaying rapidly. I sold it for $3.41 and had a total risk of $1.59. Remember: you sell an iron condor when price is close to what you think it’s going to stay at. You sell it for a credit.
How do you calculate risk?
$5 spread – a credit of $3.41 = leaves you with a risk of $1.59
Obviously I’d love to get a max profit which would be $5, but that’s unlikely.
So for these types of trades, we look for 40-50% overnight. I bought it back the next day for $2.05 per contract. With that I was able to make about 50% of my credit on an overnight trade. It worked out pretty well. At the end of the day, what I do when a trade’s expiring is I wait till the end of day Friday, and because theta is decaying quickly I just wait … wait… and wait.
But before I wrap up this letter let’s dive into what makes an iron condor, an iron condor.
When you’re looking for price to stay within a specific range, typically the best strategy to use is an iron condor. Why? It’s a neutral strategy. If you’re looking to trade or pin, by selling an iron condor at 280, you’re looking for that and premium decay overnight from Thursday to Friday.
So for this particular AAPL trade I waited, and then I ended up closing the trade right when AAPL was trading near my target at 280 (it doesn’t have to trade at the exact spot as long as it’s in the range of 280 ± 3.41).
When next Friday expiration rolls around, let me know what tickers you’re eyeing in the comments below!
Options are new to me. I am taking John’s SAS right now and having my eyes opened to the set up. I am just about to start watching the Options 101 class. Can’t wait.
Is an Iron Condor difficult to enter into the system?
I plan on being one of John’s students to brag about.
I really like what I am learning with Simpler Trading.
Bob
Aced the trade, but the math …. not so much. $5 spread – $3.41 credit = $2.59? That looks like my math. Your trade was better than advertised. You only risked $1.59. Love it.