In options trading, timing can be everything.
The best idea implemented at the wrong time can spell trouble. Let’s take Amazon (AMZN) as an example. A technical trigger occurred for me on Monday signaling a long opportunity. Implied volatility spiked pretty hard Monday lending me to think about having short vega exposure. An Iron Condor comes to mind. But, instead of selling equally out of the money call spreads and put spreads, I want to leave myself long delta. Remember, I generated a buy signal this morning. So, if I sell a put spread that is closer to the money than the call spread, I will have an asymmetrical Iron Condor.
Now I would like to address time horizon. Regular January expiration implied volatility is about 25% right now. But if I go out past 1/22/16 expiration, the implied volatility jumps to over 40%! That’s great, you can sell implied volatility there.
Careful! Implied volatility is up there for a reason. Specifically, AMZN reports earnings on 1/27/16. In all likelihood, AMZN implied volatility is not coming down until after the 27th. So, you cannot always judge a book by its cover. We are better off sticking to regular Jan expiration and taking advantage of some decay that will actually occur as opposed to any decay be taken back by implied volatility rising. One way to approach this is:
Buy (opening) the AMZN Jan 662.5 put
Sell (opening) the AMZN Jan 665 put
Sell (opening) the AMZN 705 call
Buy (opening) the AMZN 707.5 call
For a credit of $1.50 or greater.
This will afford us laying odds of 0.667:1. Our max gain will be the entire credit as long as AMZN is above 665 and below 705 come Jan expiration. We can lose as much as $1.50 should AMZN go below 662.5 or above 707.5 at expiration. Our break evens are 663.50 to the downside and 706.50 to the upside.
