The Perfect Trade After The Fed Cut Interest Rates

One day after the Fed's decision to lower interest rates by 0.5%, with the plan to lower 1% more before the end of the year, what the charts might do over the coming weeks into the election has all changed.

The moves up in the markets we're seeing suggests that short positions have been forced to leave the market. From my reckoning, this suggests that we have a pullback ahead into a choppy range.

And I have the trade to profit from that right here…

Today, we will use $SMCI to set up a trade with a short iron condor. 

The premise is the following – we will sell a short call spread and a short put spread for a credit which pays us first but holds margin in our account while the position loses value. When we sell spreads, we are anticipating that we can buy them back cheaper for a profit.

Trade structure – the short iron condor

• Sell to open 1 SMCI 15 Nov 500 calls
• Buy to open 1 SMCI 15 Nov 520 calls
• Sell to open 1 SMCI 15 Nov 360 puts
• Buy to open 1 SMCI 15 Nov 340 puts

The credit we can collect here is $10.60.

Different to a long position, the short position has a risk event that is calculated in the following way:

1. The distance between the two call spreads: $500 – $520 = $20.
2. The distance between the two put spreads (also $20 here) but you can design them anyway you like. This defines the total risk.
3. We collect a credit that lowers this risk: $20 – $10.60 = $9.40, which defines the total risk we accept if the stock tests and holds either of the long strikes in question.
4. The breakeven prices are as follows: $510.60 on the call side ($500 + $10.60) and $349.40 on the put side ($360 – $10.60).
5. The goal will be to collect 50% of the collected about or we sell the position with about 18 days before expiration if the stock begins to move around near the edges.

The strategy result provides three choices to exit the trade.

1. To sell the position once the 50% profit is achieved (or whatever profit you deem acceptable).
2. To buy back the short iron condor spread once it hits your loss threshold as determined by personal risk. This will happen with extreme movement.
3. To buy back the short iron condor with 18-21 days before expiration. If all is going well and you have decided to hold the trade into closer to the end of expiration, consider at least taking some of the position off as risks tend to rise the closer we are to expiration. I have had many a trade go sideways taking it down to the wire and not capturing gains, so I do not advise doing this.

If You Want More Trade Profitable Ideas, Get 3 New Stocks To Trade Every Sunday and Never Run Out Of Ideas

Image Via Shutterstock