Happy Monday, traders! I’m on vacation playing with Mickey Mouse and the kiddos this week. I wrote today’s piece last Wednesday, February 19th. Though some of the prices may have changed, the lessons remain timeless. Enjoy!
Two weeks ago, I spun a tale on one of the first tech stocks known to man – Microsoft (read it here). It concluded with a trio of trading thoughts on how to capitalize on Mister Softee’s delightful setup. The stock’s overbought posture, coupled with high IVR, was begging for one of my favorite strategies, the iron condor.
And, unlike that mean old nasty SPX condor, which almost pecked my eyes out, this one worked perfectly. Let’s take a closer look.
At trade entry, MSFT stock was scorching hot but overbought. Extremely so. Most stocks (sans TSLA, cause it’s from planet Cuckoo) will pause or pullback after such a sprint. If profit-taking is dramatic, then it’s the former. If the selling pressure is light, then it’s the latter.
In Microsoft’s case, bears had no conviction. The selling was phoned in and toothless. As such, it meandered. Partial credit for the levitation or absorbing of all supply coming into MSFT goes to the Nasdaq for its insanely bullish backdrop.
Do you know what else has happened? Implied volatility finally topped. With stock buyers easing off the gas pedal and MSFT chilling out, options demand finally retreated. The IV Rank, which stood as high as 100% just two weeks ago, has come back down to 60%.
That is what we call a volatility crush. While not as dramatic as the post-earnings freefall often seen, it is nonetheless a thing of beauty for traders holding short options positions. Remember, short options positions equals negative vega. And negative vega racks up profits when implied volatility tumbles. Honestly, this is the best possible scenario if you faded the volatility spike with condors.
Stock sideways + vol crush = iron condors deliver quick profits.
On February 11th, with 38 days to expiration, I sold the March 160/170 bull put and the 200/210 bear call for a net credit of $2.13.
Fast forward to February 20th, and there are now 29 days remaining until expiration. Due to the volatility crush and sideways slithering of MSFT, the condor rapidly fell to $1.13.
Do the math. That’s slightly over a 50% gain in 23% of the time of the trade. I call that a payday advance, a frontloading over returns. It was as if Microsoft kindly said,
“No need to wait, Tyler. You’re a kind soul. Instead of making you wait halfway to expiration to capture 50% of your profit, you can have them now. You’re welcome.”
What Mister Softee Said To Me
The $1.00 gain also satisfied my rule of shooting for a 10% gain on high probability trades. Not one to look a gift horse in the mouth, I promptly took profits and bid farewell to Microsoft.
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