Take Risk, Avoid Danger: RUT Tight IC with a Twist

This idea is for educational purposes only and is not a recommendation.

In this volatile market one of the best things we have on our side is time. In these unprecedented times, the market is likely to create some large swings up and down with several unexpected legs moving further up or down then many would expect under normal conditions. This presents some wonderful low risk entries for traders who would like to play a long game of chess with the market.

In order to make money in the markets we must take risks and our objective here is to take risks but to do it with a defined risk and to put the probabilities on our side.

The Strategy:
Sell a deep in the money spread at least 3 months out to let the market move over time to our spread area.

The Product:
We're going to use the RUT which is a cash settled index so we don't run the risk of our short strike being assigned.

The Entry:
When the market gets overextended (in your opinion, based on your technicals) Sell a $10 wide spread deep in the money for a $8.50 credit or more. This makes the total risk on your trade $1.50.

Exit 1:
Exit Scenario one is to take your profits and run once you've hit a profit target, in many cases you'll be closing it out months before expiration.

Exit 2:
Exit Scenario two is to Sell the opposing Spread to create a Tight Iron Condor that would have build in profit if it closes out of your pay zone, but would produce much larger profits if it trades in that area the last week of expiry. In that case you would close out the entire Iron Condor for larger profits the last week of expiry.
If the price is way out of the range, let it expire as you already have built in profit that will settle after expiry.

Example:
I'll use a real world example of a trade I put on to better show how these work.

The market was moving lower and lower and hit a new low in the 350 area. The RUT had been down for about 17 straight days. With time on my side and my experience of how fast short covering rallies can move I TOOK SOME RISK, BUT AVOIDED DANGER by selling the following position.

March 5: Sell (1)RUT MAY 440/430 PUT Spread for $8.70 Credit, total risk $10 - $8.70 = $1.30 ($130)

March 19: I could by back this position today for $5.95 with a profit of $2.75

I could also sell the top side of this position to create a tight IC by selling the MAY 450/460 for $3.00. This would give me a total credit of $8.70 + $3.00 = $11.70 for a trade that only has a risk of $10.00, in other words I make $1.70 no matter where the prices closes in May. If it trades near those strikes the on expiry week the profit will be much higher.

The keys are to sell with plenty of time so the market has plenty of time to move in your desired direction and you MUST use a cash settled index to avoid assignment risk.

The reason I like this trade is that it has a low defined risk, vega is in your favor, delta is in your favor once it moves in your direction, takes up very little margin and has an extremely high probability of winning.

This idea is for educational purposes only and is not a recommendation.