What Is an Iron Condor. An iron condor is four options in one order: you sell a put and a call near the price and buy one of each further out as insurance. You keep the credit if the fund stays between the short strikes, and the insurance fixes the worst case in advance.
Enter all four legs as one order at the mid, net credit, day order. A few cents less credit is fine to get filled.
The Setup
China is the market nobody could agree on this autumn. Next week it gets its verdict. Presidents Trump and Xi are set to meet at the Asia-Pacific summit in Shenzhen, and China's biggest tech companies report around the same days. Money has already rushed in: Bank of America's Michael Hartnett counts a record 86 billion dollars into China in four weeks. FXI, the fund of China's biggest companies, has climbed 7 percent off its October low and still sits 15 percent under last year's high.
That suspense is what I sell. FXI has moved about 18 percent a year lately, while its December options price about 24. So I sell an iron condor into December: four options that pay me up front if FXI stays in a range around today's price. This one does not lean. It has similar room up and down, and it wins if China's big week ends with less drama than the options charge for.
Where You Win, Where You Lose
FXI iron condor, 1.46 credit: the grey line is the profit or loss at expiry, the orange curve on Dec 2, the exit day, with breakevens at 32.50 and 36.30. Max loss $154, max gain $146 per contract.
What you are betting. You are betting that FXI stays between the two break-evens until December 2, about 6 percent below Monday's close to 5 percent above, with similar room on both sides. Near today's price that pays about 39 percent on the money at risk.
When we are wrong, and what we do then. The story breaks if the range breaks: a summit surprise or an earnings shock that carries FXI past the upper break-even, 5 percent up, or below the lower one, 6 percent down, before December 2. Half the stake lost is where I stop. The exit rule: out by December 2, about two weeks before expiry; sitting in the middle of the range, I may hold longer. Earlier only if a fast move costs about half the stake and the story has changed.
The Chart
China Large-Cap (FXI), daily candles over six months with the 40, 50 and 200 day averages. The box is where the whole credit is kept, the band between 32.50 and 36.30 is the profit zone on Dec 2.
Trend: down 10 percent this year and 15 percent under last October's high, up 7 percent off the October 23 low and back above its 40 and 50 day averages (EMA40 and EMA50 as drawn).
Levels: the upper break-even sits above the 200 day average, where last week's rally paused; the lower one sits near the late October low.
The Big Picture
The range is the market's own. The options price a move of about 6 percent either way by December 2, and the break-evens sit about that far out. Over the past year FXI stayed inside a box like that two times in three.
The evidence pulls both ways, which is what a range trade wants. Hartnett's record inflow says the buying is real, and he credits Beijing's own state funds for it. Goldman's desk sees the rotation out of American tech lifting China. Against that, China's factory prices are rising at the fastest pace in four and a half years while consumer prices barely move: costs up, demand soft. Each side has placed a bet on direction. I collect from both.
Three Things That Matter Before Dec 2
One week carries most of the risk. Alibaba, JD.com and Baidu are due to report between November 16 and 19, the summit runs November 18 and 19, and Tencent has not confirmed its date. With FXI near a break-even going into it, I close early.
Beijing wants a climb, not a spike. Goldman notes that China's central bank doubled a currency reserve rule on November 3 to slow the yuan's rise. A slower yuan means calmer moves in Chinese shares priced in dollars, which is what a range needs.
The Fed decides December 9. Before today's inflation numbers, Goldman's rates desk had a rate rise about 86 percent priced. A stronger dollar weighs on Chinese shares. We plan to be out a week earlier, by December 2, before that decision.
Sources: Press reports, Nov 9. BofA, Nov 6. Company calendars, Nov 10. Goldman, Nov 9. Official Chinese data, Nov 9. Goldman, Nov 10. Prices: mid quotes, Nov 10.
The Open Book
The older Tuesday Targets still running, marked at the close of Nov 9, as the scoreboard carries them. The letters: AMPL 36/52, SPY 43/52, EWZ 44/52, DIA 45/52. Every one is scored in public, winners and losers alike.
Tuesday Target Live This Thursday
Tuesday Target Live is my free Thursday session: thirty minutes on Zoom, the Tuesday Target trade on screen. This Thursday, November 12, at 10:30 am New York time, 3:30 pm in London: where the FXI trade stands, what has changed since Tuesday, and your questions. It is free. One click on the link and you are in, no Zoom account needed.
From next Thursday, November 19, Tuesday Target Live starts half an hour earlier: 10:00 am New York, 3:00 pm London. Same link.
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Every Tuesday Target of the year, scored, winners and losers alike.
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All articles are purely educational; they are not tailored to any particular individual or portfolio and do not constitute investment advice.