Market Overview

New Market Highs And How Were Playing it With Iron Condors, Risk Management, And Time


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Stocks continued their ascent this week closing at fresh 5 year highs and only a few percent shy of all time highs. Yes, seriously, all time highs. The RUT has already been logging all-time highs in fact.

We were expecting S&P 1500 and got it Thursday and today. Momentum is definitely slowing but the bulls will likely runs stops above 1500 before they take a breather. 1507-1512 is not out of the question. This would inflict max pain for Bears.

We don't try to call tops or bottoms as that is a losing game. Topping is a process and what you are seeing in the price action is just that. To reiterate, that doesn't mean it cant go higher. What it does mean though more exposure exists to the downside than upside at this juncture.

For reference, the Dow is up +6% month to date and the S&P is up +5% MTD. The SPX is up +160 points form the Nov lows approx 67 days ago. More detail will be provided in this weekend's trading video.

The Weekly Trading Service continues to manage its risk and Greeks very well by stair-stepping it's SPX spread higher (4 times now) for additional credit each time. The trade now carries a $0.90 credit for a 5-strike wide trade.

This trade has been a great example of how to manage Delta & Gamma risk and get paid to do it by taking in more credit each time. Once the SPX t slows its parabolic move we will be able to let this trade expire and book a heck of a winner. At the current credit the trade would yield a +21% gain ($0.90 credit / $4.10 margin requirement)

The Monthly Trading Service continues to hold its 4 Iron Condors despite 2 of them getting squeezed thanks to the SPX & RUT's parabolic moves. Some are worried about a repeat of last year when we got caught on the wrong side of some trades that contributed to our worst professional year ever (down -9%) after multiple years of >60% annual returns. We have got to be the only people that actually remind of that!

So what's different this time? Time and market dynamics. In previous years we traded front month options (expiring within 30 days). The problem there is that when things go wrong you don't have time to recover.

As a result of last years pain, we moved to back month trading (expiration >30 days) and things have worked out great! In fact, the shift in our strategy has resulted in a 38% gain in the last 4 months for closed trades in the Monthly Trading Service.

Our current trades, while getting squeezed, have 49 days until expiration while markets are at 5 years highs, volatility at 5 year lows, and all after a run of >11% in the S&P in only 67 days.

Subscribers may have noticed that although the SPX & RUT have risen strongly again this week, our positions have not been adversely effected. This because of Theta decay, a decrease in option volatility, and the fact that >30 days exists until expiration. This alone validates our strategy enhancement to back month trading.

In summary, we are happy to hold our trades, including the ones getting squeezed here, because time and parabolic markets are on our side.

Have a great weekend!

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets Trading Ideas


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