How I’m Taking Advantage of 2 Important Tailwinds in this Volatile Market

How I’m Taking Advantage of 2 Important Tailwinds in this Volatile Market

Posted On November 12, 2020 10:58 am

In the past few posts, I’ve discussed how the Options360 service has been employing credit spreads.  Whether it’s been the iron condors in index products, such as SPDR 500 (SPY) and Nasdaq 100 (QQQ) pre-election, to take advantage of the expected decline in implied volatility, or fading the extreme moves we’ve seen on viable vaccine news. 

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The one commonality is that I’m taking advantage of two important tailwinds; an expectation for a continued decline in overall volatility and the unrelenting march of time decay (theta).  Backing up a bit, let’s review what a credit spread is, and some of its pros and cons.  They come in the form of calls and puts, allowing both long and short credit positions. It’s created by simultaneously buying and selling either puts or calls with the same underlying security and expiration, but with different strike prices.  

Two main credit spread benefits are 1) you don’t necessarily need to be right on a directional basis to make money and 2) they benefit from time decay.  A third, if the less quantifiable aspect is that credit spreads offer tremendous adjustment flexibility — be it profit taking or defending a position.  The other day, I disclosed my bearish call spread in Brinker (EAT).  That turned out simple and we closed it on Wednesday at $0.15 for a 45% return on risk and 65% maximum profit potential in just two days as the combination of a decline in price and drop in implied volatility worked to Options360 members’ benefit.  

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Note: I’ll always close a position once it has neared 75% of the potential maximum profit.  For credit spreads, I’ll close the trade once the value slips below $0.10, as the risk/reward becomes asymmetrical. Trying to pick up the last dime while steamrollers rumble by can be hazardous to your financial health. The QQQ and SPY iron condors become a bit more problematic as both indices staged surges, which threatened our iron condors call strike.  In both cases, I simply rolled up the put side to collect additional premium, reducing risk and allowing time decay to go back to the forefront of the force and delivering profits.  My Paypal (PYPL) bull put spread has been the most challenging; starting as a simple put credit spread in the 177.5/182.5 strikes.   When shares dropped below $180 yesterday, I took action and sold the 192.5/197.5 call spread, creating an iron condor and collecting a $1.90 total premium.  Now, PYPL’s back above $190.  The question is: Do I need to make another adjustment? Or, just white knuckle it for the next few days and let time decay do its thing? 

Stay tuned, or better yet… 

Sign up for my Options360 service to follow me along in real-time as I manage these positions & add new ones in the coming days. 

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.