The Perfect Trade For The Post-Election Market Drama

Markets have moved dramatically after the election, and sharp moves like this often settle into a new rhythm before continuing. For this reason, when looking for a trade for today, I'm looking for a strong stock with solid options volume and beefy option premiums.

This allows us to trap the stock through a range of motion as it settles into its new pattern.

Here's the trade to make right now.

Our target is Netflix (NFLX), and the option trade is a short iron condor.

The short iron condor assumes price action will sit in a range of motion, and while it sits in that range, we will allow the collected premium to erode.

The short iron condor is created by selling a long call spread out of the money and selling a put spread out of the money. The goal is to allow time decay and time premium to erode so that we collect revenue. In that sense, we are paid for sitting still over the passage of time.

Here's the specific trade:

• Sell to open 1 NFLX 20 Dec 805 CALLS
• Buy to open 1 NFLX 20 Dec 810 CALLS
• Sell to open 1 NFLX 20 Dec 700 PUTS
• Buy to open 1 NFLX 20 Dec 695 PUTS

The total credit is $2.17 at the writing – and it is the maximum profit that the position will yield. The maximum loss is calculated by subtracting the difference between the strikes ($5) here, from the collected premium. $5- $2.17 = $2.83 risk.

We choose to sell premium as it carries a higher probability of success as markets will only trend 30% of the time and will sit in ranges 70% of the time. This, of course, is an approximate as price action varies from stock to stock.

The strategy result provides three choices to exit the trade:

1. To buy the iron condor back once it gets to an acceptable profit margin for you. I customarily look for 30% to 50% profit for these kinds of trades.
2. To buy the iron condor back once it hits your loss threshold as determined by personal risk – this will happen with extreme movement. I customarily look at about 65%, though depending on my size, I will choose 50%.
3. To buy the iron condor back into the week before expiration, if all is going well and you have decided to hold the trade into closer to the end of expiration (I have had many a trade go sideways taking it down to the wire and not capturing gains, so I do not advise this).

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