By Josip Causic, Online Trading Academy Options Instructor

Is it possible to have a nearly perfect setup for an Iron Condor but not the right premium in the underlying to actually place it? Yes. Here is the what and how of it.

In order to place an I.C. (Iron Condor), I usually start by looking at the overall market environment. Such a trade is unsuitable for a market that is trending either up or down. Consequently, those committed newsletter readers of the Online Trading Academy community have probably noticed that for several months I have not entertained the topic of Condors, either Iron or other. By the way, the adjective IRON means that the position is built by using both option classes – calls and puts – while the condor without the adjective IRON in front of it means that only one kind of option was used, either calls or puts.

Anyhow, going back to the current market environment, by looking at the chart below which shows the monthly candles of the Standard and Poor's 500 it is evident that for the last six months, the market has gone straight up. Even if a simplification is made to the point of plainly counting the green candles, there were 5 green candles over the last six months and only one red one. It is interesting to notice that the size of the body of that red one isn't significant. The Japanese term for that particular formation is a Spinning Top which represents indecision and not necessarily Bearishness.

Figure 1

If the market is so Bullish, then the question arises whether it makes sense to place an Iron Condor which is a directionless trade. The answer to this question depends on the time frame we are aiming to hold our Iron Condor as well as the levels of support and resistance. Hence, let us look at the technicals and then proceed with the selection of the strike prices which are to be sold. In Figure 2 below I have changed the monthly chart into a weekly chart in order to get a better look at it. I have also drawn Fibonacci Retracement lines on it from its highest point to its lowest point. Observe that different Fib levels are colored differently; for instance, the 23.60% Fib is in light blue while the 50% is in dark blue. Also, examine on the chart that I have drawn in black a diagonally descending line from its high towards the current price. What I have actually done to the weekly chart is called expansion. In order to better forecast the future possible movements of the underlying, I have added some extra white space to the right side of the chart. Moreover, while drawing the black diagonal line, I made sure that the line has more than a single touch; otherwise it is not very valid. Usually the more touches the better. In this particular case, the reader of this newsletter should observe that the underlying's 50% Fib line and the black diagonal line coincide at the same point.

Figure 2

In simpler terms, I am expecting the underlying to possibly go up to that 1122 level, or zone, and then to find resistance. Again, I am using the word level or zone because 1122 won't be the exact resistance level, but it'll be plus or minus a few points.

Having located the possible resistance level for my future Iron Condor, I also need to look at the level of support. From Figure 2 above, I could either make a claim that the 38.2% Fib line could act as one, or I could use the 23.6% Fib line. Let me start with the first one: 38.2% Fib line. The area of 1015.25 has acted for the past couple of weeks as resistance and it was only last week that it was broken, for the price closed above it. The current week, which is still unfinished, has created a spinning top. Embracing the assumption that this particular level is going to hold is somewhat risky, so I like to consider the 23.6% instead. The 882.76 area for the past couple of times has acted as a solid support line; therefore, it isn't illogical to forecast that most likely if the underlying goes lower it is at the 23.6% that it will find solid support.

Going back to creating an Iron Condor these are the facts that we have observed:

The next step is to pull up the option chain to see what strike prices are available for trading as well as what strike increments. In our particular case on the S & P 500, the increments are five points wide and if this trade was to be done according to this T.A. (technical analysis) then the steps should be those listed in Figure 4.

In this particular case, as described in Figure 4, both vertical spread trades would have greater credit than the debit and a sold Iron Condor would have credit on both of these vertical spread trades. For those unfamiliar with Iron Condor intricacies, I suggest re-reading one of my previous articles on this topic, Iron Condors Versus Condor Spreads, as it would be a good start.

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 worthwhile 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 which needs to be paid in order to open that position.

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 summer.

- Josip Causic

DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

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