Condor Options

Analysis: This is an easy one, so we’ll make it quick: the Nasdaq 100 (QQQQ) is very short-term overbought, to the tune of a 2-day RSI (Relative Strength Indicator) reading of 99.05 out of a possible 100. It’s reasonable to expect some weakness there over the next day or two.

Trade: How to play this thesis? Three possible routes:

1. If you’re totally gung-ho, just buy the QQQQ October 50 puts for $0.59, they should get a nice pop.
2. If you’re a bit more reasonable, you could buy those same puts, but in addition sell the QQQQ October 48 puts for $0.26, for a net debit of $0.33. After all, no one’s saying that tech is going to collapse (after all, they’re the big leaders now, right?), we’re just taking advantage of a possible pullback blip.
3. Or if you’re really smart, and don’t want to be one of the suckers buying time premium, you can have exactly the same directional thesis but be a net seller of time decay by selling the QQQQ October 52/53 call vertical for a net credit of $0.32. That means you’re selling the 52 calls and buying the 53 calls. (Psst, don’t ever sell naked calls, just don’t do it.) The benefit of this third approach is that if there’s never any pop down and the index just drifts for a bit, you can still have a winning trade. On the other hand, a short call vertical isn’t really appropriate as a one- or two-day trade, so maybe those naked long puts aren’t such a bad idea…

Of course, if you’re clever enough to understand the benefits of selling time premium, you’re probably already a subscriber to our iron condor newsletter, where all we do is hang around and sell time premium.

Oh, and all the normal “bonus trade” disclaimers apply: we’ll probably never mention this trade again, you’re on your own, this trade may very well destroy your life savings and give you the hiccups, etc.

[tags] options, trading, puts, Nasdaq, QQQQ, vertical spread [/tags]