Taking What the Market Has to Offer

A good basketball player has the skill set to do many things, but the discipline and flexibility to take what the defense is giving them. As traders, we must approach this game with the same mindset. We want to develop a set of skills that allows us to profit in a bullish market, a bearish market, and even a choppy market, but we also want to be disciplined enough to remain flexible to take what the market has to offer. Reaching for the “low hanging fruit” is often an easier path to profits than forcing your personal agenda on the market. 

Keeping the above in mind as we head into next week’s trading will be very important. This coming week is the first quarterly expiration of the year in the options market, and this historically results in a choppy, back-and-forth, volatile week for the market. Trying to force the issue with directional trades, (in both directions mind you) can be a difficult proposition with the kind of price action this week tends to bring.

In the spirit of taking what the market has to offer, this is often a great week for selling iron condors on the indexes, looking to benefit from the back-and-forth chop that ultimately brings the market nowhere. With that being said, my major focus this week will be to place one or two high probability iron condors on the $SPX that offer an attractive risk: reward.

My reasoning for choosing to pursue a condor on SPY rather than on QQQ can be seen in the charts below. If you compare the structure of the tech index to that of the overall market, things are still a little bit sketchy for tech trading under its daily 21, which could potentially lead to more violent downside.

In comparison, the SPY is back above it’s 21 EMA, resting in a new daily squeeze and looks like a much better candidate for avoiding further selling pressure. With the iron condors we are looking for chop, and the SPY has a structure here that supports the idea of chop.

I’ll be looking to sell this iron condor for this coming Friday’s expiration, and I’m looking to obtain a 4 to 1 risk:reward ratio at the very least. As for strike selection, we must take into consideration that the expected move for SPX into Friday is about $60. Therefore, to avoid getting caught up in chop, I will be aiming to sell short strikes further out the money than the expected move so long as I’m able to obtain an ideal risk reward.

It’s worth noting, that while quarterly expiration week is historically a choppy one, we know that anything can happen in the markets. So while playing in an iron condor very well may be the perfect trade for the week, we must be prepared for anything and be ready to make adjustments if necessary as always! 

Be prepared to see A LOT of big intraday swings over the next few days, and please be cautious about chasing them. Should this quarterly expiration week unfold like the ones before it, chasing those intraday moves can lead to nothing but headaches as they tend to be nothing but “head fakes”. In terms of probabilities, the iron condor will likely be our best chance of pulling profits out of the market this week. With that being said, find peace of mind in knowing that while we sit back and let our options decay, someone else out there bought those options and are paying the price! Money will shift from the accounts of the impatient traders into ours, and that is a beautiful thing