Click here to view a chart of the underlying, overall position, P&L graph and Greeks.
The general market has been in an up trend since mid-November. We have broken into all time high territory. Looking at the chart, we have a bearish divergence in place (price making newer highs in opposition to the oscillator). While the market can continue to trend up as it has been for sometime, it might not be unreasonable for some sort of a pull back to come into play.
The play in question is to utilize an iron condor strategy (somewhat direction neutral) with some protection at either end.
The short strikes of the IC were selected with a delta of 12 & -10 for the call & put legs.
Overall position (46 days to expiration)
-10 x May 1630 calls, +10 x May 1640 calls
-10 x May 1450 puts, +10 x May 1440 puts
Credit collected = $1,700, Margin = $8,300 (discounting commissions)
Buy a protective call & put for roughly 5% of the margin cost (smooths out the current P&L graph)
+1 x May 1640 call, +1 x May 1375 put
This reduces the credit collected to $1,305 & increases the margin requirement to $8,695 (discounting commissions)
The overall position has a slight -ve delta (benefits from a decline in price initially), which is OK, since there is a huge -ve Vega component (hurt by a rise in volatility, which would occur by a fall in price). Passage of time would help the trade (+ve theta).
The objective is to make around 10%-12% of the margin, with a max loss of not more than 12%-15% of the margin cost. The trade should not be held till expiration. If adjustments are used to tweak the trade, then they should be done before reaching the max loss. Some triggers would be the delta of the short strikes increasing by around 12-15, or when the trade is down around 7%-8%. Various adjustments can be employed depending on the situation, outlook & risk appetite – such as rolling out the threatened strikes, closing one end (good side) & converting the other to a butterfly, initiating a debit spread at the appropriate end to cut the deltas etc.