The following RUT Iron Condor has been constructed based on Deltas of between 6-7 points. The aim is to run the trade for 36 days with no adjustments & target the 12% potential ROI.
This trade is constructed with short deltas of 7 for each side, thus the probability of success in the trade between now and expiry is around 86%. (100%- 2*7 deltas). In fact, You can calculate the probability of remaining between the upper and lower standard deviation marks off the risk chart (35.7% + 32.2% = 68% or 1 standard deviation). In addition this trade has a yield of 12% (potential profit of $660 / $5,340 margin = 12%). Not bad for a monthly return.
The trade has the 1 standard deviation bands marked on the risk chart and the issue here is that the trade has much more room to the downside at execution. We received $1.10 credit for this trade and we could increase the upside width or keep the full $1.10 on the basis that the market has appeared to be over bought for some time now and many traders are expecting a retracement to lower levels. In this case keeping the full $1.10 and leaving the trade with greater downside capacity would seem logical.
So what is more important when constructing the trade - Implied volatility as indicated by the standard deviation range or the probability of success as calculated by the 7 point delta range?
Cheers
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