Andrew Crowder's  Instablog

Today's price action was much like the last three trading days…a few intraday swings, but ultimately all of the major benchmark ETFs finished the each trading session flat. The 200-day moving average seems to be the area of support for the market and once we see a breach I think we could move decisively lower over the coming weeks. There are still two unclosed gaps in the Russell 2000 (IWM) so I would not be surprised to see both of them close soon. If the second gap closes we could see IWM push as low as $77.58.

And with IWM still in a short-term overbought state I remain focused on selling out-of-the-money credit spreads, more specifically bear call spreads with a high-probability of success. If we see a swift move lower over the coming days I would not hesitate to take the other side and sell a few bull put spreads, but we will have to wait and see what happens over the next 3-5 trading days. If we are able to place a bull put spread we would have the makings of an iron condor with a nice wide range. This is how I prefer to trade iron condors…patiently wait for the market to allow me to leg in to a condor rather than trade both sides simultaneously. By legging in I am able to create a larger range, thereby increasing my probability of success. Again, I want to initiate trades with a probability of over 80%. That would equate to a delta of roughly .20 plus or minus .05.

Remember, it's all about the probabilities. Initiating trades on highly-liquid ETFs with a high-probability of success is the key to long-term success. Of course, the strategy needs to be coupled with a sound risk-management approach and that can be taken care of at order entry through proper position-size. Basically, stay reasonably small and you will avoid any catastrophic events that could really put a dent in your account.

Disclosure: I am short IWM, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.