WDIS: Two Yutes - Beginner Options Trading - July 2, 2021 - The Frankenstein Spread

published 3 weeks ago by tastytrade, Inc.

All of a sudden we’re in the middle of an unbelievable rally. The S&P 500 and the Nasdaq are shooting up like crazy growth stocks--this is not the usual behavior of equity indices. On the other hand, the Russell (a small cap index) is just going sideways. Tom shows the yutes a way to trade this diversion: a bastardized iron condor--AKA a Frankenstein spread.  Errol follows Tom’s directions and sells a call spread in QQQ (Nasdaq) and a put spread in IWM (Russell). You could think of this as wonky iron condor--they’re both representations of the market at large, and with both spreads in place, you’re delta neutral. But it’s also a pairs trade--E is selling the spread between the two indices. Kay does another version of the same trade but with Smalls futures products: she sells a /STIX contract and buys a /SM75 contract. Both yutes are betting that the two indices will come back closer together. They’re relying on a mean reversion of the spread, just like IV Rank mean reverts.

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