So a lot of people don’t know about a simple trading technique where you can make money on a volatile asset no matter which way it moves. This type of trade works if you know the stock will go either up or down but you don’t know which way.
To perform this trade you need to have an intermediate level understanding of options and how they work. If you don’t then I recommend you check out the following video by The Plain Bagel to grasp the concept.
While options are tricky to understand at first just keep reading about them and it will click.
Another good video to watch if you need further help is Sky View Trading’s video: https://www.youtube.com/watch?v=4HMm6mBvGKE
The Trade: Buying the Iron Condor on $AMC.
So for this example we are going to look at $AMC. Currently it is one of the most talked about and hyped stocks on the market with millions of dollars being pumped into and taken out of the stock every minute. This price fluctuation is caused by massive retail interest in the stock alone. These retail traders only know how to buy the stock so it naturally inflates the price over time, and as $AMC goes higher more and more people panic buy into it causing a runaway snowball effect.
Check out that price action on a 1 day chart, wow.
The problem is that nobody knows if the stock is going to go up or down. One day $AMC could be down 10% and the next be up 25%. Most retail traders only know how to go long, or buy as it’s called, a stock. They buy and sell at a later date. This inflates the price both up and down as retailers trade en-masse together, pumps are higher and panic sells are lower.
The Iron Condor trade using options will allow you to profit so long as a stock will trade outside a range. For example if we say that we don’t think that $AMC will either go above $72 or below $40 at sometime over the next 6 months we can make money.
As you can see from the above chart. Chances are pretty good that $AMC wont stop being volatile for the near future and will either go skyrocketing up, or more then likely go plummeting down. We can profit from either directional move.
Setting up the Trade: Buying the Iron Condor.
Every trade is you putting up $425 of capital to make $75 so long as $AMC goes out of the range of $50 t0 $70 at any point over the next 6 months.
So how does the above image work? Basically we are buying an OTM call at the $70 strike price and selling a $75 while also buying the $50 put and selling the $45 put. All of these contracts expire in December of this year which means that if $AMC starts trading outside of the $50-$70 range at any point over this time period you start to make money. Think about the likelihood of that on such a volatile asset…
Risk and Return: 18% return on capital employed.
So what is the risk of this play? Well the trade costs $425 to perform and at max you can only make about $75 which is an 18% return on investment. 18% is a huge return on the lifetime on a contract with such a high likelihood of success. If on the off chance that in December of 2021 $AMC is at $60 then your contracts will expire worthless and you will be out your $425.
But you don’t have to wait until then to cash in on your gains. You can simply wait for $AMC’s price to move outside the $50 to $70 range to instantly sell your contracts for a profit. As such at any point up until December of 2021 you can in theory make the money, it could happen next week for example.
18% return is nothing to scoff at seeing as the market as a whole only really returns 8-11% a year
Conclusion: You can profit from either a stock going up or down.
By risking $425 you can get a damn good return of 18% on a really high probability trade. If we upscale and buy 10 sets of Iron Condors then we can make $750 for $4,250 worth of capital investment. If the trade goes your way then not only will you get your $4,250 back but you can also get a nice extra bit of cash of $750.
It’s a pretty easy way you can enter into a trade knowing that if the stock continues to remain volatile then you will make money. Further, this type of trade can be put into motion on any of the main “meme” stocks coming out of WSB.
Overall I hope this type of trade can help you in your portfolio. It’s just another tool in the toolbox and the trick, like any tool, is knowing when the perfect time to use it is. For buying Iron Condors, it’s when volatility is either going to increase or remain the same and price movement will continue. These are good to take out on hype plays where retailers are driving the price up an insane amount.
Further, you can check out some of the other articles below.
Here is how long it really takes to learn how to trade options. Most people think they can jump right in however that’s dangerous.
There are 3 things that could happen if nobody buys the company’s stock. Make sure you are aware of these effects so that you can be ready.
Global Macro is far from dead. Here are 5 tricks to help you generate above average returns in your global positions.
As usual I wish you the best of luck in your trades! If you like posts like this then you should subscribe to the bog, share on social media, and follow me at https://chronohistoria.com/blog/ !