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Iron Condor Traders Cash in TSLA
Option traders sell options spreads to offset the cost of decaying options or as a way to bet that a stock will not move in a certain direction. In the case of the Iron Condor, option traders sell two vertical spreads in opposite directions. One is put spread and one is a call spread. Each […]
Option traders sell options spreads to offset the cost of decaying options or as a way to bet that a stock will not move in a certain direction. In the case of the Iron Condor, option traders sell two vertical spreads in opposite directions. One is put spread and one is a call spread. Each wants the stock to move in the opposite direction. When set up successfully the stock will sit in between the two short strikes and the put spread and call spread will expire worthless. If this happens, then the seller of the options gets to keep 100% of the premium or credit that they took in for each spread.
A great example of this is an Iron Condor that our subscribers in the Time Bandit Option trading service just closed out on July 27, 2018. Subscribers jumped in the Tesla 295-347.5 Iron Condor on Wednesday, July 18th for about $1.75. This means they bought the 285 puts and 357.5 calls and sold the 295 puts and 347.5 calls. The stock was trading around $321.05 at the time of analysis. We saw that the stock had an at the money straddle of about $19.73 and was moving on average about $13.7 a day. All three moving averages, (50, 100, 200) were trading below the stock price at the time of entry.
As you can see from the chart below the stock had some negative news after we analyzed the trade. Elon Musk was using social media poorly combined with some news on the company requesting cash back from their suppliers. This pushed the below our 295 strike for three days, but it never closed below the strike so we were able to maintain the spread. It rallied on July 25th to get back to the 100 day simple moving average. With the market selling off today, especially in the tech sectors, TSLA followed along. It sold $295.34 but rallied to close at $297.18.
So at the close the stock price was within the short put and short call allowing us to collect the full $1.75 per Iron Condor that the option trader entered. This amounts to $175 per spread We collected 100% of the premium and had a 21% return on risk in 8 days.
