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As most investors know, the U.S. stock market went sideways in 2011, and for that matter, the past decade. Perhaps the market will shoot up or crash down from here. However, the highest probability outcome for the market in the short-term is that it will be within a few percent of where it is at now. Hence, an investor might always want to consider having at least a few positions/trades in their portfolio that will profit if the market goes sideways. This is the latest in a series of articles that discuss market neutral strategies.


Since the last Jan 15 post (here) on this topic, the overall market has moved nicely higher. Most investors long biased portfolios should also have moved higher. As might be expected, the two market neutral option trades have not performed well in an up market. Specifically,

  • Cree (NASDAQ:CREE) - moved straight up after earnings and the Jan. iron condor moved to max loss quickly. With such a rapid move I did roll the call spread leg of the original trade to a Feb 28/27 credit spread. I'm hoping for the stock to correct and reduce the loss in this trade.
  • Las Vegas Sands (NYSE:LVS) - is trading near the call side of the iron butterfly trade in place and hence is slightly out of the money. I'm still holding this position, but may consider rolling up the put side of the trade shortly to take in a little more premium.


Recently I added two more iron condors to this group of market neutral trades.

1). Last week, prior to their earnings announcement, an iron condor in Starbucks (NASDAQ:SBUX) was established. Specifically

  • Sell Feb $45 Put, Sell Feb $49 Call
  • Buy Feb $44 Put, Buy Feb $50 Call

A credit of $.46/contract was received. Max loss on the trade is $.54/contract. Hence this was just a little less than "even money" that the stock stays in the range. Also, at the time of the trade Starbucks was trading near $48 so this trade was skewed towards the down side. This condor had a relatively narrow $4 trade but historic volatility in this stock is a relatively tame 16. After its run-up into earnings it seemed like a reasonable candidate to go sideways for a month. After earnings the stock pulled back a little, but as of the time I'm writing this post it is trading just over $48. On the high side of the trading range and barely in the range and in the money ... for now.

2). An iron condor for the Feb 3 weekly expiration in Amazon (NASDAQ:AMZN). The specifics of the trade are:

  • Sell Feb weekly $170 Put, Sell Feb weekly $205 Call
  • Buy Feb weekly $165 Put, Buy Feb weekly $2106Call

With Amazon trading in the low $190s, this trade was established for a credit of $1.63/contract.

For the trade to achieve this maximum gain, the stock needs to stay between $170 and $205 for 4 days. With earnings announced this Tuesday this trade is largely a belief that the company will not surprise negatively (like they did last time) and the stock will trade relatively sideways for the rest of the week. This $35 wide trading range (about 18%) is larger than the expected move forecasted by the option market. Time decay and volatility compression should both occur quickly later this week.

Disclosure: I am long AMZN, CREE, LVS, SBUX.

Disclaimer: This posting is for informational, educational and entertainment purposes only and should not be considered investment advice.