2:05 p.m. New York time
I’m passing on all four of the potential trades I analyzed:
- GDXJ continues to have a risk/reward ratio higher than I like, at 6.2:1.
- IYR also has a high risk/reward ratio, at 5.4:1
- XHB has a low implied volatility rank, at 11%. I prefer 25% or higher.
- XLRE has an options grid with odds that don’t quite work for me. Normally I’ll set the short call in an iron condor at delta 15, which will normally have somewhere around an 85% chance of expiring profitably, out of the money. XLRE’s delta 15 call strike has a 73% of expiring profitably. I’m unwilling to give up that security.
My present trading rules don’t set a firm cut-off for acceptable risk/reward ratio’s. So how high is too high? I’m playing it using the stomach-churn metric. Anything above 5:1 seems a bit scary to me — My $50 credit on a contract could produce a $250, and I get that strange uneasy feeling in my gut at the mere of thought of it. I feel more confident below 4.5:1, and turn cartwheels of happiness if anything gets below 3.5:1.
Scientific? No. Conducive to peace of mind? Absolutely. And even if that stomach churning feeling is produced by my subconscious, it’s a cri de cœur that I’m always inclined to heed.
12:45 p.m. New York time
I’ll be looking at these prospects today: XHB, GDXJ, XLRE and IYR.
By Tim Bovee, Portland, Oregon, April 30, 2019