News of recession and government spending populate the headlines, making decisions for investors a bit trickier as we work through to find strength in stocks and our exposure to them.
What we do know is that when we see these kinds of headlines, we begin to focus on core household spending that keeps us afloat in our homes. For this reason, we're looking at Procter & Gamble to hold a price range during the summer and early fall.
The trade is a short iron condor on PG stock with extended duration expiring in October, which allows us to make money when the price goes up a bit, goes down a bit, or essentially does nothing.
This trade is a neutral position and anticipates the hold of prices between 145 and 165 over the summer term and into the fall.
- Sell to open 1 PG Oct. 20 monthly 165 calls
- Buy to open 1 PG Oct. 20 monthly 170 calls
- Sell to open 1 PG Oct. 20 monthly 145 puts
- Buy to open 1 PG Oct. 20 monthly 140 puts
Total credit collected is $2.56 per spread. The strategy is to allow time decay to work in our favor.
Defending The PG Stock Option Trade
With a Composite Rating of 93, PG stock is ranked fourth within the personal care industry group, according to IBD Stock Checkup.
And no matter what headlines emerge about recession or debt ceilings or government spending, we'll still need the basic supplies to run our homes.
However, simply because we will use these items does not mean the stock will continue to rise under the pressure of other things happening in the markets. My suspicion is that we grind sideways in the markets as all the unknowns become known to us when we study the headlines and watch what they do to stock prices.
We collect $2.56 of a $5 spread between the strikes; this is a big credit as volatility begins to lift.
The potential high profit line for the PG stock trade is calculated in the following way:
The difference between the strikes of the spreads, $165 to $170, and $145 to $140 equals $5, less the collected premium of $2.56 makes $2.44 the risk event.
The break-even prices (before commissions) are 167.56 and 142.44.
Understanding The Short Iron Condor
Headlines that send worrying signals like recession often push me into neutral strategies because they will benefit me through points when price trending directionally stops. This is a neutral strategy that uses four option contracts with the same expiration and four different strike prices.
Neutral strategies work in areas of low volatility, while grinding about within a range for an extended period of time.
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The market currently sits in a unique position with a low volatility reading (VIX). But underneath, the volatility of volatility is beginning to rise. This can lead to whipsaw price action. Our goal then is to become more powerful traders in the current environment.
Identify the key chart levels.
The breakout level is 165. The breakdown level is 145. Our premise is that this chart is likely to fade at a retest of its highs, and bounce off its lows.
Scenarios for the PG Short Iron Condor Option Trade
What could happen:
- The stock moves between the strikes and does not breach and hold above or below our key levels noted above
- The stock moves past the break-even levels and begin to erode profit margins
The ideal motion I like — especially as we face news-heavy cycles with these worrisome headlines — is to wait for the value of the option to erode over time and take the position off once we get to a 50% profit line.
Set an alert for the prices on the edges of the trade. When they trigger, give the trade a few days to wiggle through, and then make your decisions based on your own risk profile.
As with all trades, consider what you like about holding the position in the first place and consider your risk carefully.
Anne-Marie Baiynd is a 20-year veteran trader of stocks, options and futures and is the author of "The Trading Book: A Complete Solution to Mastering Technical Systems and Trading Psychology." She holds no positions in the investments she writes about for IBD. You can find her on Twitter and Stocktwits at @AnneMarieTrades
