Trading Options in Squid Game 🦑
On September 17, Netflix released a Korean thriller similar to The Hunger Games.
As a brief overview, Squid Game encompasses hundreds of cash-seeking contestants who accept an invitation to compete in a series of children's games. However, the games take a turn and the contestants are dragged into an inescapable nightmare.
While the latest blowout TV series has nothing to do with options trading, I couldn’t help but take advantage of the growing popularity and clickbait a little.
So hopefully you enjoy the article and let me teach you how to trade options in Squid Game 🦑 🤝
I promise it’s worth the read 😉
Let the Games Begin 🏁
So how does Squid Game relate to trading options??
INTRODUCING THE IRON CONDOR
Going back to my previous articles, I’ve featured different options trading strategies such as the put credit spread, call credit spread, covered call, and short put.
The Iron Condor is a combination of the put credit spread and call credit spread.
As a result, if you know the basic function of the credit spread, you would know that this would imply a neutral trading strategy.
Instead of profiting off of a bullish/bearish move in the underlying ticker, you would profit off no movement.
The above diagram presents a visual representation of the iron “SQUID” condor.
But what does it mean??
- Squid Head — Represents your total profit at the time of expiration
- Squid Legs — Represents max loss at the time of expiration
An example order would look like this:
- Call Spread — FB $87.5 Short Call (RED) / FB $90 Long Call (Green)
- Put Spread —FB $77.5 Short Put (RED) / FB $75 Long Put (Green)
- = trade w/ 71% probability of profit and $48 credit
- Notice: Width of the spreads = total collateral (Ex. above $250)
This demonstrates the bare bones of an iron condor and what the trade will look like.
Iron “Squid” Condor Timing ⏰
Just like every other option selling strategy, you always want to have an “edge” whenever putting on the trade.
Although the “edge” may not be present, it can be something as small as an indicator or some mental note.
Iron condors should be placed in times of high Implied volatility. This means that the premium to collateral ratio is enough to imply an “edge”.
For example, we’ll use breakevens to visualize IV:
- 30 IVR — FB Call Spread breakeven: $91.5
- Above 50 IVR — FB Call Spread breakeven: $93
As you can see the breakevens are doubled due to higher implied volatility.
This is just to show the nature of implied volatility and in reality, does not scale by multiples of IV factors (Ex. 20 IVR → +$1 breakeven, 40 IVR → +$2 breakeven).
To add a few more parameters, I like to time my Iron Condors when I’m able to collect 1/3rd the width of the strikes in premium upon entry.
While ensuring liquidity in a position, being able to collect and get filled is an important part of timing a trade. Making sure that there’s volume and that you’re not missing out on any POP is an essential part of consistent profit.
We’ll use Facebook again as an example:
- Facebook Iron Condor: +$75 / -$77.5 / -$87.5 / +$90
- Premium Collected: 0.90 or 0.90 X 100 = $90
- Strike Width = $2.5 → 2.5/3 = 0.83 or $83
Using this parameter as a rough guide will help establish a success foundation of 67% on the trade.
How do you MANAGE the condors?
- Using backtest data, statistics support closing when positions reach 50% of the position’s max profit.
- Ex — We collected $90 from the FB trade and currently have a $45 profit due to a severe drop in implied volatility = %50 has been reached, immediately close the position and realize profits
- But significant directional moves can put condors at risk = 100% < x loss
- To combat this, we can roll out the untested credit spread and absorb more premium to hopefully expand our breakevens and hope there’s either a pullback/increase.
Squid Options Conclusion 🦑
Iron Condors are a great tool to add to the options arsenal. They are defined risk strategies that allow you to control your portfolio more dynamically and add variety no matter the situation.
That being said, it’s important to understand what an Iron Condor is and how to use it to your advantage.
If you still have no idea what an Iron Condor is, check out THIS article for more details and help!
This comical introduction skims over the basics so if you want a more in-depth guide, please let me know!
THANKS FOR READING⚡️
I will be writing more about my Instagram experience, financial freedom, stock option trading and whatever I find interesting. Please let me know in the comments on how I can improve my writing, and if you enjoyed please consider smashing that follow button!!
— Tristian Xu