Non-Directional Options Strategies

Non-Directional Trades – These are trades set up with probability on our side that the price will consolidate in the short run

 
High-Probability Iron Condors – The purpose of this trade is to secure maximum distance and minimum hassle. We will enter these trades during periods of maximum edge, such as the apogee of a current rally based on exhaustion levels. This is meant to be about a 20-30 day hold where we’ll collect theta and will take very simple steps to defend this position. The best defense for this position is an excellent, contrarian entry into the teeth of a strong rally.
Offense:
  • Enter 60-90 calendar days from expiry
  • Use the SPX or RUT
  • Start by placing the short call option at a .10 delta strike price
  • Place the short puts equidistant as the short calls
  • Use $10-wide spreads
  • Real Risk on the trade is total risk (spread width x # contracts) minus credit received.
  • The probability of the entire trade is real risk/total risk, should be between 75-90%
  • Size the position to real risk being 1% of your account balance
  • Enter when Daily chart chop index shows <.38 exhaustion or deeper
  • Weekly chart should reflect current trend and should be <50 or lower
  • An alternative offense would be possible during very sharp, deep pullbacks in the context of a larger uptrend, where the daily energy hits <.38 on the chop index during the pullback. In that condition, we would start by placing the put spreads first (use same method of determining distance as above) and then wait until the dead-cat bounce or relief rally to occur before filling the call spreads. Ensure that the call spreads are BEYOND the former highs from which the drop initiated. The call spreads might be placed in a different options cycle by the time the bounce occurs.
Defense/Exits
  • Exit at 50% of potential profit with GTC debit limit order
  • Exit when time is <30 days to expiry
  • Exit @ short call delta at .35
  • Exit @ short put delta at .45
  • A possible discretionary exit is to wait until exit debit is 3x original credit, which allows for deeper attacks before bailing.

 

Low-Probability Iron Condors – The purpose of this trade is to secure very quick, robust profits during short-term consolidations. We will enter these trades during periods of maximum edge, such as the apogee of a current rally based on exhaustion levels. This is meant to be about a 5-7 day hold where we’ll collect theta and will take essentially zero steps to defend this position other than a timely exit. The best defense for this position is an excellent, contrarian entry into the teeth of a strong rally when markets are showing the strongest tendency to pause and consolidate briefly.
Offense:
  • Enter 20-30 calendar days from expiry
  • Use the SPX or RUT
  • Start by placing the short call option at a .30 delta strike price
  • Place the short puts at a .30 delta as well
  • Use $5-wide spreads
  • The credit MUST be $2.50; a higher credit means a narrower condor.
  • Real Risk on the trade is total risk (spread width x # contracts) minus credit received.
  • The probability of the entire trade is real risk/total risk, should be between 50%
  • Size the position to real risk being 1% of your account balance
  • Enter when Daily chart chop index shows <.38 exhaustion or deeper
  • Weekly chart should reflect current trend and should be <50 or lower
  • This trade is only meant to be played during quiet/trending conditions to the upside. It is not a good choice for other market characters.
  • The best application for this trade is when the price PULLS BACK briefly into the lower range of the iron condor.
Defense/Exits
  • Exit at 25% return on risk debit limit order
  • If former rally re-appears and upper short strike price is penetrated, consider exiting at small loss
  • If daily chart re-energizes above chop index level of 55 again, consider taking smaller than 25% profit and exiting.
  • If price pulls back BELOW lower edge of the iron condor, I will remain in the trade and look for the first rally higher.