Consistent Income Using One Ticker

This week is full of job reports and yesterday we saw one saying the number of U.S. Job Openings declined in June. I’m not that worried though. Remember we still have more job openings than workers. But wait! Why is unemployment not 0% if that is true? There are a number of reasons from worker location, the skills needed, salary requested, and so on.

I’m not surprised to see the number of open jobs decrease, but I’m paying more attention to jobless claims because those are workers who no longer have jobs. Those are the workers who would struggle to make car or house payments. Those are the workers who won’t spend money at stores or buy new cars.

The bigger question is what, if anything, will come from Pelosi’s visit to Taiwan. China’s Foreign Ministry spokesman said China’s military won’t sit idly by. Hopefully empty threats, but that could impact the markets if any action is taken – military or otherwise.

In the meantime, as the markets remain relatively flat, theta decay is your friend this week so I thought I’d write about a trade that has been showing remarkable accuracy lately.

This one trade has a 90% accuracy rate. Keep reading to find out more.

IWM is the ETF for the Russell 2000 and it has weekly options available to trade. That means every week there is an opportunity to sell options to collect premium.

By now, you may have heard us talk about an option strategy called the Iron Condor – which consists of a call credit spread and a put credit spread. The challenge is picking expiration dates, an exit strategy, strike prices, and then managing the trade, especially if it goes against you.

Here’s a strategy for your consideration with a 90% success rate in a simulated environment. I know, I know. Real trading is different, but you have to start somewhere.

Ticker: IWM
Days to Expiration: 10
Short call and put strike: 15 delta
Long call and put strike: 5 delta
Exit: 25% profit

The issue with Iron Condors is that one losing trade can knock out 7 winners. One way you can combat that is by exiting the trade if IWM trades at either of the short strikes. Or you can determine what your win rate is and calculate the max loss you’re comfortable with per trade. Or maybe if the deltas of the short strikes change by a certain amount.

There are other ways to defend Iron Condors, and you’ll be hearing more about defending and repairing trades from the various Traders Reserve team members over the next couple of months.

Keep in mind that this is a very mathematical trade, using probabilities instead of chart patterns or any other analysis. This trade is about trading small, and often enough that you make probabilities work in your favor. There will still be losses and still a trade you need to maintain – this isn’t one to set-and-forget.

Here’s an example of the IWM Iron Condor:
Expiration: 12 Aug 22 (10 days from 8/2, when I set this up, but you’d wait until 10 DTE)
Short Call: $197 (14 delta)
Long Call: $202 (5 delta)
Short put: $179 (16 delta – closest to 15)
Long put: $172.50 (5 delta)
Current Price: $188.69
Max Profit: 82 per condor
Profit Target 25% of max profit ($20.5)

option strategy

From the risk graph, you can see that as long as IWM stays between $178 and $197 by expiration, you would have a profit at expiration. In this case, we’re looking to exit at 25% profit and not hold all the way through to expiration. While making $20 every couple of days may not seem like a lot, it’s a 3.5% return. You only need a 6% return every month to double your account by the end of the year.

There’s more nuance to this strategy, but I wanted to give you a starting point with specific criteria for you to use to place paper trades and see how this does for you. Write down what happens when volatility goes up and what happens when it goes down. How did your trades do? What happens if you keep placing trades every 10 days, even if the previous one hasn’t closed? How does the risk graph change?

Option strategies get easier with practice. Now you have a foundation for a potentially winning strategy.

If you have any questions, comments, or anything we can help with, reach us at any time.
Email: [email protected]
Phone: (866) 257-3008

 

Jeff

Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society

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