Here’s an option trading tip from Matthew Buckley, a contributing author for “The Street”. In the recommended trade, he suggests 20 contracts. If you’re new to options trading or if you’re not quite ready to risk that much capital yet, you can always trim that down a bit. Make sure you stay within your comfort zone. And also as I always preach, do your own research before placing any trade. Don’t just take his word for it. Check it out to see if you agree.
Strategic Mindset: Market neutral with possibilities of surges in volatility.
Target: Rio Tinto (RIO) trading at $53.99.
Commit Criteria: RIO implied volatility is overpriced relative to its forecast volatility of 4.58% over the time frame of this trade. We are looking for possible price movement but for it to stay within its $50 to $57.50 price range until the exit of this trade.
Tactic: Opening 20 RIO May 2012 Iron Condors (strikes [47.5/50/57.5/60]) for a $0.58 credit
Tactical Employment of Iron Condor:
- Buying to Open 20 RIO May 2012 $60 Calls
- Selling to Open 20 RIO May 2012 $57.50 Calls
- Selling to Open 20 RIO May 2012 $50 Puts
- Buying to Open 20 RIO May 2012 $47.50 Puts
- Net Credit: $58 per Iron Condor for a total of $1160.00
- Max Gain: $1160
- Max Risk: -$192 per Iron Condor for a total risk of -$3840
Mid-Course Guidance:
We will be watching for a price movement near the short strikes. If the short strikes are threatened we will adjust the Iron Condor as necessary.We don’t want trade expectancy dropping below 2%. Based on this, we have two price targets at which we need to consider an adjustment. RIO trading below $50.51 and above $56.47 are triggers for an adjustment in our Advanced Model Portfolio.
Profitability Target:
We will wait for this Iron Condor to expire worthless taking the $1160 credit as profit.
Exit Tactic: We will wait for this Iron Condor to expire worthless, adjusting as necessary.
