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Let’s go to the “Trade,” window, and take a look. I’ve already pulled up the 139, 141s. We wanted to stay 5 points above and 5 points below, selling an iron condor. When I select, I type in SPY up here, and I get the SPY strikes. As always, I try to widen as much as possible.
Up here, if you’ve only got 4 strikes out, you’re not going to see as many strikes as you want in your window. You want to try and widen that out as much as you can, especially if you’re selling iron condors.
I like to sell at least a dollar on the put and the call side. I’m going to start out at 139. If we take a look here, 139 is just above this resistance point, so that’s good. We’ll go with that. We want to sell an iron condor, and that will bring up our order entry here. We’ve already got it set at 139 on the call side. I like to do two points apart. I like to go 139, 141. If I was doing the 140, I would go 142s.
On the downside, we want to try and go 5 points below, which is right around 127. Let’s see what we can get at the 127 strike. We can get decent prices, but you know what? We can go lower than that. We can go to the 124s, if necessary. If we sell the 124s, we can still get a dollar form. We’ll go 2 strikes below that, at 122. Now we’re looking at anywhere from 72 to 73 cents. That’s not bad, and that’s a pretty wide range.
I want to do 5 of these. Let’s just analyze this for a second. Our maximum profit is going to be $360, on 5 contracts. Our maximum loss is $640. Since the SPY index can only be at 1 point – it can either be higher or lower than our breakevens, since our maximum loss is $640, we don’t get margin on both sides of the trade, if we enter this order as selling an iron condor.
We only get margin on one side, because they know that if the market goes this way, we’re making money on our put side. If the market is going down, we make money on the call side. We only get margins on one side of the trade, which is great. That’s why I like TOS so much.
We’re just going to spread this out, and I think we’re good to go. I like this trade very much. We’re right in the center. If necessary, we can adjust.
Our Vega is slightly negative. What happens when you’re slightly negative Vega; if you’re short Vega? If Vega drops, you’re going to profit just a little bit more. If you’re long Vega, and Vega goes up, then you’re going to profit. But I think we’re probably going to remain fairly neutral.
Let’s just take a quick look at the VIX. As you can see, I’ve also done a long term chart. Let’s go back a couple of years. You can see that there was a little reverse head and shoulders down here, on the VIX, going back to December of 2007. This little blue uptrend line that looks like the VIX has been following it pretty well.
As you know, when the VIX increases in price, stock prices generally decline. A higher VIX indicates more fear in the market. That includes prices going down. We’ve had a number of rallies during this uptrend in the VIX. Right now, our uptrend line was violated here. It closed below here, below here, and below here, and then it went back up again. Now it’s hanging right around here. It may go up to this 25 level, which looks like it was a prior resistance area for the VIX, before it broke through. It may come back up here. We’re kind of in this no-man’s land here.
I’m looking for the VIX to come back down into this area, between 22 and 21. We really want to be short Vega here. We would like to be a little short Vega, which our position is. If Vega does decline, that will actually help our position somewhat.
Let’s go back to the Trade window and see where we are. We actually have about 72, if we hit the mid-point. With these, you’re not going to hit the mid-point too much, and I’m not going to quibble over a penny or two. The bid and ask prices are pretty tight. They’re about 5 cents apart.
If we go ahead and we try to get 73 – let’s do that. We’ll send that out. We’ll see if we get filled on that.
As always, we wait a few seconds, to try and see if we get something in. If we can get it in at 73, that would be very nice. If not, we may have to shave a few points off that.
When I’m trying to determine market direction; where to set my support and resistance points, especially when I’m selling an iron condor, I like to take a look at the VIX. Price is great. You can take a look at price. I’ve done the same thing for the Dow Jones Industrials here.
I like to take it back a few years, just to see where we’ve been. If I go back 20 years on the Dow Jones – I have to go back farther than that, on a really long-term basis. But it helps you get some perspective. You can see from 1932, here, we hit this downtrend channel line, which held back in 1982. This was really the beginning of our current bull market. You can see from 1982 on – with the exception of between 2000 and 2003 – we had a small bear market. But we’re still well within this very long-term uptrend channel line. We’re still at the 50% level of that uptrend channel line. We haven’t even gone below 50% of that channel line.
On a long-term basis, this really helps to give you some perspective on the market. If you’re a long-term player, you take a look at this resistance line here, that was hit five times, and then finally broke through here. You should have been long and over that, all the way back in 1982.
Let’s zoom on in that. You can see it broke through over here. Resistance became support, when it came back down in here. Then it just took off. It’s been going up ever since.