In this article we will explore how premium can change. First we will look at how premium can lose value after only one day due to lack of price action. Secondly, at the end of an option’s contract, near expiry, one would expect to see very skinny premium on out-of-the-money options, yet exactly the opposite might be the truth.
Although some of the volatility traders blindly sell premium even without looking at a chart, in the Online Trading Academy’s Professional Option Traders course, we teach that the real edge comes from the technical application of the knowledge of supply and demand combined with implied volatility readings; hence the chart below.
Figure 1
The above daily chart of the Russell 2000 cash settled index shows the price action contained within a range between supply and demand. For several days the RUT was hugging the 800 level and simply going sideways. One of the option strategies for a sideways market is the Iron Condor. In this strategy the trader is simply anticipating that the underlying will stay within a range until expiry. In the case of the particular trade we will discuss, the August regular weekly options were used that had an expiry date of the third Friday in August. The two horizontal lines on the chart represent the supply zone (red 815 line) and demand zone (green 775). The exact price of RUT at the time of entry was 801.25.
The strike prices of the trade involved the following: BTO (buy to open) +820 call and STO (sell to open) -815 call. This segment of the Iron Condor is known as a short vertical call spread, or simply a Bear Call. The bottom line is that the premium sold can be kept if the underlying stays below the sold 815 strike price. As can be seen from the figure above, RUT could even go up $13.75 before the… Continue Reading
