Ever since the inception of weekly options on the major ETFs, I have been trading them consistently, though I have only written about them sporadically.
In this article, I will go over a lesson about complex spread execution on the weeklies. I love to enter my short verticals, or iron condors, just before the bell on Friday afternoons. The logic behind it is very simple: Sell the theta over the weekend and suffer limited market exposure due to the fact that over the weekends, the markets are closed. Certainly, there is always a possibility of a gap up or down, which I am willing to take. Rewards are always tightly connected with the risk.
The First Trade: Iron Condor on SPY
At 12:43 pm PT, just about 17 minutes before the bell, I sent in my SPY iron condor trade for a credit of 26 cents and it filled instantly. The fact is that the spread was trading at 22 cents as natural and 26 as the mid price between the bid and ask spreads of these multiple-leg options. The exchanges would "naturally" want to give me less money for my spread, so asking 26 cents, or the mid price, seemed like an aggressive trade. The moment I sent in the order, I was instantly filled.
Frequently, when that happens, it means that I have asked too little, and one of the reasons for sending only a foot soldier (a single contract spread) in first is mainly because of that. My very next order was for a penny more, or 27 cents, and I increased the size to nine contracts, which would in turn give a total of ten contracts, or my original intention.
The order for nine contracts of iron condors was filled about six minutes later at the limit price that I had specified, 27 cents per contract. The spread between the strikes was one point and the credit was 27. The difference between the strike spread, $1 in this case, and the credit of 27 cents, means that my maximum loss on this SPY iron condor would be $730 for ten contracts. The max profit is $270, while the rate of return is (27/73) 37%.
NEXT: The Iron Condor Trade on IWM