An Update on the SPY Directional Condor Spread

  • SumoMe

There are a lot of ways to make money in the financial markets.  Unfortunately, too many investors and traders are unaware of the fact that many of these ways involve methods other than buying stocks or mutual funds and hoping they “go up”.

(See also An Update on Crude Oil Volatility Play)

In this article dated 2/5/16, I highlighted an example of one way to play volatility using options on SPY.  The beauty of this example trade is that it can make money under a variety of scenarios.  In this piece we will take another look at what actions might be considered now that there are only 10 days left until March expiration.

The Original Trade

The particulars of the original trade appear in Figure 1 (click to enlarge).1Figure 1 – SPY Directional Condor (Courtesy www.OptionsAnalysis.com)

There are a lot of ways for this trade to make money:

*If SPY soars there is unlimited profit potential to the upside

*If SPY is anywhere between 182 and 204 at March expiration the initial credit of $402 would be our profit

*If volatility falls prior to March expiration early profit-taking can be considered.

*The downside breakeven price is 181.

The Update

As I write, SPY has rallied is now trading at $198.40 and the trade is showing an open profit of $296 with 10 days left until expiration as shown in Figures 2 and 3.2Figure 2 – Updated SPY Directional Condor (Courtesy www.OptionsAnalysis.com)

4Figure 3 – Updated SPY Directional Condor (Courtesy www.OptionsAnalysis.com)

Where to from here?

One of the keys to trading success – particularly in options – is knowing when to exit a position.  With this trade the “hope” is to simply ride it out until expiration and hopefully earn the full initial credit of $402.

However, the real question at the moment is “what do we not want to have happen?”  A closer look at Figure 3 reveals that this trade can actually turn into a loss if SPY rises to between 205 and 208.

So what can be done to:

A) Give us a chance to earn the full $402 credit and;

B) Not let this trade turn into a loss

Answer:

The truth is that there are many potential ways to answer the question.  But for example’s sake, let’s just look at one approach as highlighted in Figure 4.

Action #1: Close trade IF SPY rises above $202 a share.

Action #2: Close trade IF SPY falls and open profit falls to $225.

If neither of these things happen then simply wait for expiration and collect a profit.

3Figure 4 (Courtesy www.OptionsAnalysis.com)

Summary

As always the trades I write about are for example only and not trade recommendations.  In addition, the real purpose of these examples is to help traders understand that there are many ways to trade and make money that do not involve buying stocks or mutual funds and “hoping” they rise in price.

Jay Kaeppel

Leave a Reply

Your email address will not be published. Required fields are marked *

This blog is kept spam free by WP-SpamFree.