New from this issue: one defined-risk options trade a week, the exit rule printed on the card, every result scored in public. The long macro essay moves to The Desk once a month.
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
Fear moved house this month. It left the stock market, where index options cost less than at almost any time on record and Goldman's panic index, a gauge from zero to ten, closed below one on Friday. It settled in oil and bonds. Energy is where the two meet. Options on XLE, the energy ETF, price more fear than in three quarters of the past year, so the premium a seller collects here is fat while it is thin everywhere else.
West Texas crude sits near 90 dollars after two weeks of headline whiplash, and XLE still fell from 66 to 61, dragged by the same bond yields that hit banks and utilities. Two ropes pull in opposite directions. The price has gone nowhere for a month while everyone argues. The condor sells that argument. We collect 2.20 today and win if XLE sits between 58.15 and 66.50 on October 30, when the exit rule closes it.
Where You Win, Where You Lose
XLE iron condor, 2.20 credit: the grey line is the profit or loss at expiry, the orange curve on Oct 30, the exit day, with breakevens at 58.15 and 66.50. Max loss $280, max gain $220 per contract.
What you are betting. You are betting that XLE closes between 58.15 and 66.50 on October 30, the exit day breakevens. The nearer it sits to the middle that day, the more of the 2.20 you keep. Beyond a breakeven the credit flows back.
When we are wrong, and what we do then. A Hormuz deal knocks ten dollars off crude and can pull XLE through 60 before the exit rule catches it. A new front in the Gulf sends it through 65 as fast. A diesel export ban squeezes the refiners inside the ETF.
The Chart
Energy Select Sector SPDR (XLE), daily candles over nine months with the 40, 50 and 200 day averages. The box is where the whole credit is kept, the band between 58.15 and 66.50 is the profit zone on Oct 30.
The Big Picture
Oil now trades like a policy. When West Texas crude probes 95 dollars the headlines arrive at midday, when liquidity is thinnest, and the barrel drops before anyone finishes lunch. A diesel export ban gets modeled at Goldman before it is announced. The Federal Reserve hikes because the barrel says so, and crude and the ten-year yield now move together more tightly than at any time in 35 years.
Everyone hates this arrangement. I find it reassuring. A price with a manager has a ceiling, and a strait that stays shut has a floor. In 2022 Washington drained a million barrels a day from its reserve and the June peak never returned. Managed prices drift sideways, and sideways pays the patient.
Three Things That Matter Before Oct 30
JPMorgan's trading desk turned tactically bullish on Tuesday, seeing oil trend lower in a choppy fashion and the ten-year yield end the year at 5.05 percent. Lower and choppy is the weather a condor wants: XLE drifts, its options bleed, we collect.
Traders price a 71 percent chance of a Fed hike on October 28, yet the Fed has never hiked in October before an election since 1990, says UBS. No hike takes pressure off yields, the rope that has been pulling XLE down.
Exxon and Chevron report on October 30 before the open, our exit day. Near a breakeven we close the evening before. Deep in the zone we stay: their report drains the fear from XLE's options, and that drain is our profit.
Every Tuesday Target of the year, scored, winners and losers alike.
Every Wednesday I manage a real portfolio live on the Elite Trader call. The archive and a five-hour one-on-one program come with it.
All articles are purely educational; they are not tailored to any particular individual or portfolio and do not constitute investment advice.