Tuesday, December 4, 2012

$NDX trade for a house payment using $AAPL as gauge

DATE: 12/4/2012 - this is NOT a trade recommendation of any kind. Selling options will lose you money!!! Don't try this at home.

SITUATION:Apple and other major tech names have retraced from recent highs and are showing relative resilience here.

ASSUMPTION: Fiscal cliff won't cause a complete selloff  (10% or more). While $AAPL and other big NDX names are at recent low points I am comfortable assuming they provide me with an inherent put in $NDX.

THE TRADE: So I structure iron condors (Jan or feb or even longer) that are lob-sided to the upside. BUT with a very very tight leash.
Ex1: JAN $NDX iron condor 2550/2525-2875/2900. Today it pays $6.475 to open.
Theoreticals: chances of full profit: 89% for the upper leg; 80% for the lower leg; 70% overall trade.
Rew/risk=.35
Break evens=2540ish, 2880ish
Buffers: 4.1% downside and 8.1% run-up
Dollars at risk=$18.5each (max loss)
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Ex2: JAN $NDX iron condor 2600/2575-2875/2900. Today it pays $8.475 to open.
Theoreticals: chances of full profit: 89% for the upper leg; 70% for the lower leg; 59% overall trade (pretty tight).
Rew/risk=.51 (better than Ex1 since much more aggressive trade)
Break evens=2590ish, 2880ish
Buffers: 2.3% downside and 8.1% run-up
Dollars at risk=$16.5each
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If I am confident that Nasdaq will be between 2600 and 2900 by mar of 2013 then I would gamble on
Ex3: MAR $NDX iron condor 2600/2575-2900/2925. Today it pays $12 to open.
Theoreticals: chances of full profit: 80% for the upper leg; 66% for the lower leg; 49% overall trade (even tighter than Ex2).
Rew/risk=.91 (almost 1to1 since much most aggressive trade)
Break evens=2590ish, 2912ish
Buffers: 2.3% downside and 9% run-up
Dollars at risk=$13each 
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THE ABOVE EXAMPLES ARE NOT RECOMMENDATIONS; SELLING OPTIONS AND OPTION SPREADS WILL LOSE YOU MONEY. I ONLY TRADE WITH MONTY I CAN AFFORD TO LOSE.  SELLING IRON CONDORS IS TRICKY BUSINESS AND WILL GET YOU IN FINANCIAL TROUBLE.