[responsivevoice_button rate=”0.9″ pitch=”0.5″ volume=”0.8″ voice=”US English Female” buttontext=”Play”]We’ve been experimenting with SPX 0DTE iron condors (ICs) for a while with mixed success. To improve the performance of our trades, we’ve considered opening them during later trading hours, when the markets have settled down, and increasing the distance between our short strikes. The disadvantage of doing these things increases the max on risk and decreases max profit. Partly, these consequences result from time rushing towards expiration.
While nothing can be done about the passage of time, we haven’t yet considered a way to get better pricing on our trades. We have treated ICs as two separate vertical spreads, which we have ordered with limit pricing, but we’ve not followed a process for using data to establish the price to use on those orders. Until yesterday’s successful trade.
Yesterday we waited until 1:45 to send in our orders. We used the ATR based on the amount of time left until expiration to determine strike prices, and we looked at the volatility in contract pricing to provide guidance on how to set the limit price on our orders.
At 1:45 SPX closed at 3768, which will be about where we’d like to center the IC. Since SPX trades at strikes with five dollar increments, we could use either 3765 or 3770 as the mid point between the two short strikes. The ATR was about 32 for the time remaining until expiration, suggesting short strikes of 3730 and 3800. Finally, we needed to set our limit price for each leg.The way to do this in Thinkorswim is to set the option panel to display vertical spreads, right click on the desired contract and display it on the charting page. The candles there will tell you the range that the spread is trading in. Armed with the knowledge of what traders are willing to pay for the contract you wish to sell, provides good guidance for setting the limit price. After going through this process and considering my personal goal of achieving $110 profit before fees on the IC, I submitted the following orders:
The put order filled withing two minutes, and the call order within nine minutes. At the end of the day, the trade made $110 and cost $2.60 in fees. Max risk for each of the verticals was $465. Using the trade management practices discussed in earlier posts, our expected max loss would have been much less.
Key take-away: Do some market research. When buying a contract, set the limit price at the level that frugal traders are paying; sell contracts for what the market will bear.
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