Personal Finance & Money Asked on August 16, 2021
AAPL is currently trading at ~115. I can construct the following Iron Condor that expires tomorrow. It has close to a 1:1 R/R ratio:
BUY APPL 121 CALL
SELL AAPL 120 CALL
SELL AAPL 110 PUT
BUY AAPL 109 PUT
If the stock has been range trading, there are no new events coming, and volatility makes it unlikely to move more than 5 points in 1 day then I ask:
Where can this go wrong?
What am I missing?
Some brokers present the midpoint as current price and that is a misrepresentation. I doubt that you can achieve a 1:1 R/R ratio if you are using the respective bid and ask prices.
Be that as it may, this is a high probability trade for a small profit.
Where can this really go wrong? AAPL moves almost 5 points and you think that your short option is going to expire worthless. AAPL then moves a bit more during after hours and you're now ITM and you are assigned. Unfortunately, your protective leg has expired and Monday morning you have directional exposure since you're now long (or short) the shares.
Correct answer by Bob Baerker on August 16, 2021
I have been doing this for some months, every week, and it works fine - until it doesn't. One sudden surprise movement of a stock will cost you what you made in ten successful deals.
Basically, you are playing a version of a reverse lottery: take as many tickets as you want, each comes with a dollar you can keep, and if you have the losing ticket, you pay a huge sum.
Answered by Aganju on August 16, 2021
Where can this go wrong?
Tim Cook announces he has pancreatic cancer and is stepping down. (When Jobs did that, as the link notes, the stock dropped 6% - precisely enough to be at the worst loss point for this trade, if it happened from 115 to 109.)
Or, perhaps in the actual real world example...
Apple stock drops from 115 to 108 on 10/30/2020, due to disappointing, if unsurprising, earnings.
5%-6% is just not that much for a stock to move in one day. Yes, it won't do that often, but it will happen.
Answered by Joe on August 16, 2021
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