Monday, April 5, 2010

New Income trade and Vol crush

So first let me preface with the fact that I learned my lesson with the NFLX trade not to go to big on this type of play. And to also consider movements outside of the expected move. With that said I would like to sell the Apr 310/300/410/400 Iron Condor in ISRG. IWO reccomended a similiar trade in May which I may also take in addition to this one. But I am looking to generate a little bit of income and try to take advantage of a possible volatility crush in ISRG as they report earnings on 4/15. See Historical Vol vs Implied Vol below from

IV is trading at about 43 vs a historical of 16. So there is 27 point variance. Below I have the daily chart for ISRG and have highlighted in grey the profitability zone for this trade. It has about a $90 zone of profitability with 2 weeks to expiration. It has about 36 points to the downside or 54 points to the upside.

As IWO stated in his thesis for the trade he did not believe ISRG was going to have as big of a gap based on the past few earnings and the recent run. I am going to bank on the same hypothesis. Below is the risk profile for the position. I dropped in the probabilities of it finishing within in the difined range and this thing has a 91.32% chance of finishing between 320-372.

As you can see from the above I am looking to sell 2 Iron Condors in ISRG for a limit price of $1.72 or a total credit of $344.

Total Risk: $1,662
Total Reward: $344

RoR: 20.7% for 2 weeks

Expected return based on the probabilities is about $170 ( p(success, 91.32%)*344-p(failure, 8.68%)*1,662))


  1. Also one thing I did not point out is the position of the moving averages on the charts. ISRG has been supporting along the 50 day moving average, which is currently at 344 and the 100 day is at about 318. Two important levels that this stock would have to blow through to get to the lower end of the Iron Condor.

  2. I had to separate the two vertical spreads in order to get part of the order through. I sold the 310/300 put spread for $1.10. I had a limit order in for the 400/410 call spread for $0.65 (mid price) and never got filled. I may look to add this second part of the leg after a move to the upside. I think we will get it.

  3. I was trying to look for some income trades tonight and was not finding anything compelling or worth the premium. Volatility is nowhere to be found with the exception of a few names that are on tap to report this week. But I guess I will use that as my cue not to force anything. I would feel more comfortable selling some puts on a pull in. I don't know how long this rally will last but at these extended prices I am not willing to take the risk. To me it still makes sense to be a buyer of options following the money as it rotates from sector to sector. Basic materials is the latest craze.

  4. How about selling some ITM calls to partially hedge against the downside while you go long call options on basic materials?