DE – Iron Condor

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John Deere – Iron Condor Credit Spread

For the weekly expiration of APR 11 we looked at an Iron Condor for DE.

We looked at selling a Call spread of 94/95 and a Put spread of 89/88.  The credit was to be $120 and the potential loss $880.  After commissions the credit was reduced to ~$50.

The trading price at the time was ~$91.20.  This gave us more than 1 standard deviation from stock price to either our call or put strikes.  Fibonacci extensions and retracements also provided support for this trade.  We continued by looking at the Bollinger bands and the moving averages.

Last night we set the trade up and executed the working order.  This morning we just didn’t feel good about it.  Therefore, we cancelled the order.

$50 profit with a potential loss of $880 didn’t seem worth the risk.  It’s an excellent return for the margin; however we would have to be extremely confident that this trade will close within our strikes.  It has to be profitable for 17 times to account for 1 loss.  This was enough for us to take a pass.

If we were to employ the expected value calculation (which we did), how would this trade stack up?

Let’s assume one standard deviation.  Therefore, we have a 68.3% chance that the stock price will stay between our strikes of 94 and 89.  Conversely, we have a 31.7% chance that they will hit above or below our strikes of 94 and 89.

(.683*50) + (-0.317*880) = 34.15 – 278.96 = -244.81

As one can intuitively tell, negative numbers are not good.  We have to make assumptions regarding the chances.  With the assumptions we’ve made this trade would lose money over time.  By the way, if we were to assume a two standard deviation, the result would yield an expected value of 7.66.  Positive?  Yes, but barely.

It’s mathematics backing gut feelings.

Disclaimer: The information presented does not consider your personal investment objectives and should not be taken as a recommendation. Further, it shall not be construed as an offer to sell or a solicitation to buy any security mentioned. The risk of loss in any stock, option, or futures trade can be substantial. Consider all relevant risk factors before trading.

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