Large options trades can provide clues to make market moves, notes Jay Soloff....
Placing an Iron Condor Option Trade: What You Need to Know (Part 2)
10/14/2009 12:01 am EST
In this particular case, as described in Figure 4 below, both vertical spread trades would have greater credit than the debit and a sold iron condor would have on both of these vertical spread trades.
The Options Chain and Strike Selection
Next, let us look at the option chain, and instead of focusing on the selection of the strike prices, let us see if there is any premium worth selling. As a replacement for the long option chain listing so many strike prices, I have pulled up the amounts that are quoted on them.
Figure 5 below shows that selling the bear call would not make sense because the debit of 95 cents is greater than the credit received of 65 cents. Likewise, selling the bull put would not work either, for the credit of a dollar is less than the debit of $1.25 that needs to be paid in order to open that position.
The Moment of Truth
Finally, the moment of truth: Why is there no "juice" in the premium if the trade is set up properly? Well, the answer is simple: Observe the distance of support and resistance from the current underlying. On the top side, 1120 is the resistance, which is 115 S&P points away from the current price of 1015. On the down side, the support is at 880, which is 135 S&P points away from the current price.
In conclusion, the iron condor trade involves selling premium when options are inflated and the premium is juicy. In the case discussed, the premium just isn't there for placing that particular iron condor with those specific strike prices, which otherwise would have made perfect sense according to an in-depth technical analysis.
With option trading, the technical setup could be there, but if the premium isn't suitable, then the best thing to do is simply pass on the trade. As an afterthought, from personal experience, it is not just when to place the trade, but also when not to trade. There is a fine line between the two.
Do not overtrade the remainder of the year!
By Josip Causic of OnlineTradingAcademy.com
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