A Timely Iron Condor Trade in Bitcoin (BITO)

bitcoin-iron-condor

Volatility continues to remain fairly high across the major indices. And as volatility increases (or at least remains above normal levels), trading opportunities increase, which opens up the options playbook significantly.

One security that continues to offer plenty of opportunities to sell premium is the ProShares Bitcoin ETF (BITO). Bitcoin, along with many of its associated stocks have fallen from grace lately. As a result, heightened levels of options premium currently exist in the proxy ETF.

And the strategy I would like to implement over the next month to take advantage of the inflated premium in BITO is an iron condor.

Iron condors, among other credit spreads (bear call, bull put, etc.) using highly liquid ETFs, are one of my favorite defined-risk, non-directional options strategies in a high implied volatility environment.

The strategy consists of a short call vertical spread (bear call spread) and short put vertical spread (bull put spread).

Sample Trade: Iron Condor (BITO)

The IV rank and IV percentile in BITO are no doubt inflated. As you can see below, the IV rank in BITO is 63.41, so now is the perfect time to start selling some premium in the ETF.

BITO-stock-chart-IV-chart

Let’s say we decide to place a trade in the highly liquid BITO going out roughly 31 days until expiration.

The expected move, also known as the expected range, is from roughly 23 to 29 for the May 20, 2022, expiration cycle.

In most cases, my goal is to place the short strikes of my iron condor outside of the expected move. Moreover, I prefer to have my probability OTM, or probability of success around 75%, if not higher, on both the call and put side.

Choosing Expiration Cycle and Strike Prices

Since I know the expected range for the May 20, 2022, expiration cycle is from 23 to 29, I can then begin the process of choosing my strike prices.

Put Side of the Iron Condor:

bull-put-BITO-bitcoin

The low side of the range is, again, 23 for the May 20, 2022, expiration cycle, so I want to sell my short put strike just below the 23 strike, possibly lower.

As you can see above, the 20 strike with an 87.15% probability of success fits the bill. In fact, it is a very conservative approach to the trade, which is almost always my preference.

Now, once I’ve chosen my short put strike, in this case the 20 put strike, I then begin the process of choosing my long put strike. Remember, buying the long put strike defines my risk on the downside. For this example, I am going with a 5-strike-wide iron condor, so I’m going to buy the 15 strike.

Again, it’s all about the probabilities when using options selling strategies. The higher the probability of success, the less premium you should expect to bring in. But as long as I can bring in a reasonable amount of premium, I always side with the higher probability of success, as opposed to taking on more risk for a greater return.

So, with BITO trading for 25.93, the underlying ETF can move lower roughly 23.7% over the next 30 days before the trade is in jeopardy of taking a loss.

Call Side of the Iron Condor:

Bear-call-BITO-bitcoin

The high side of the expected range is, again, 29 for the May 20, 2022, expiration cycle, so I want to sell the short call strike just above the 29 strike, possibly higher.

As you can see above, the 31 strike with an 87.35% probability of success, fits the bill. Once I’ve chosen my short call strike, I then begin the process of choosing my long call strike. Remember, buying the long strike defines my risk on the upside of my iron condor. For this example, I am going with a 5-strike-wide iron condor, so I’m going to buy the 36 strike.

As a result, I am going to sell the 31/36 bear call spread for the upside portion of my iron condor.

iron-condor-BITO-bitcoin

Again, it’s all about the probabilities when using options selling strategies. The higher the probability of success, the less premium you should expect to bring in. But as long as I can bring in a reasonable amount of premium, I always side with the higher probability of success, as opposed to taking on more risk for a greater return.

So, with a range of $11 (20-31) and BITO trading for roughly 25.93, the underlying ETF can move higher by 19.3% or lower by 23.7% over the next 31 days before the trade is in jeopardy of taking a loss.

Here is the theoretical trade:

Simultaneously…

  • Sell to open BITO May 20, 2022, 31 calls
  • Buy to open BITO May 20, 2022, 36 calls
  • Sell to open BITO May 20, 2022, 20 puts
  • Buy to open BITO May 20, 2022, 15 puts

We can sell this BITO iron condor for roughly $0.49. This means our max potential profit sits at approximately 10.9%.

Again, I wanted to choose an iron condor that was outside of the expected move and has a high probability of success. This is why I sold the 31 calls and the 20 puts.

Remember, when approaching the market from a purely quantitative approach, it’s all about the probabilities. The higher the probability of success on the trade, the less premium I’m able to bring in, but again, the tradeoff is a higher win rate. And when I couple a consistent and disciplined high-probability approach on each and every trade I place, I allow the law of large numbers to take over. Ultimately, that is the true path to long-term success. I’m not trying to hit home runs. I understand the true, consistent opportunities, particularly when seeking income, come with using high-probability options strategies coupled with a disciplined approach to risk management—the latter being the most important.

Managing the Trade

I typically close out my trade for a profit when I can lock in 50% to 75% of the original premium sold. So, if I sold an iron condor for $0.49, I would look to buy it back when the spread reaches roughly $0.25 to $0.10. However, since we are so close to expiration, I might ride the trade out until it expires worthless, thereby reaping a full profit. As always, the market will dictate my actions.

If the underlying moves against my position I typically adjust the untested side. Most roll the tested side, but all research states that rolling the untested side higher/lower allows me to bring in more premium and thereby decrease my overall risk on the trade. Moreover, I look to get out of the trade when it reaches 1 to 2 times my original premium. So, in our case, when the iron condor hits $1 to $1.50.

Ultimately, position size is the best way to truly manage a trade. We know prior to placing a trade what we stand to make and lose on the trade, therefore we can adjust our position size to fit our own personal guidelines. Iron condors are risk-defined, so it’s important to take advantage of their risk-defined nature by staying consistent with your position size for each and every trade you place. Remember, it’s all about the law of large numbers.

As always, if you have any questions, please do not hesitate to email me or post a question in the comments section below. And don’t forget to sign up for my Free Weekly Newsletter for weekly education, research and trade ideas.

2 comments on “A Timely Iron Condor Trade in Bitcoin (BITO)

  1. Rich Labz on

    What is your numeric definition of when a side is “tested” and do you have any additional metrics for rolling the untested side ? Thanks!

    Reply
    • Andy Crowder on

      Rich,

      I will typically roll the untested side to lower the max loss limits on the trade when the delta of the tested side, in most cases, reaches between .30 to .40. I usually roll the untested side back up to around a .30 delta. Hope this helps.

      Reply

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