Time’s Right for Iron Condor Options Strategy
So, how do you make money when the market goes nowhere? That’s the question the experts should be asking.
Stocks are going nowhere fast. I think the 12-year chart of the S&P 500 SPDRs (SPY) below says it all.
The amazing thing is that there is one simple options strategy to make money in this sort of sideways market. It’s an options strategy that beats both the bulls and the bears time and time again, and it’s called the “Iron Condor.”
Which brings me back to the stagnant performance of the market and how you, as a self-directed investor, can learn how to make money using strategies that take advantage of range-bound markets — or any market environment for that matter — and do better than just buy and hold.
The answer is simple: Use the Iron Condor strategy and allow probabilities to do the work for you.
With probabilities on our side, we can make steady reliable gains in a sideways market with the Iron Condor.
With the Iron Condor strategy there isn’t any guessing as to which way the market moves.
Because as long as it stays within a wide range, which we define, we make money.
What is an Iron Condor?
An Iron Condor strategy is a non-directional options strategy that profits when the option on the underlying stock or ETF of your choice expires within your chosen range at expiration.
The basic premise of the strategy is easier to understand in the chart below. But the key part, and the real advantage, of this trade to understand is this:
You choose the price range of the trade. Increasing the range will decrease your potential profits, but will increase your likelihood of success.
For example, I will use the Iron Condor strategy for the December 2011 expiration cycle in SPY as an example.
At the onset of the December expiration period, on Nov. 21, I established the range in The Strike Price highlighted by the blue lines on the chart below. The blue lines define how far the S&P 500 ($SPX) can move up/down before the position I recommended is in jeopardy of taking a loss. You can clearly see that this range is from $109 and $132.
The underlying SPY was trading at roughly $121.50 on Nov. 21 when I established the December expiration cycle’s Iron Condor position. As you can see from the blue lines, the range is extremely wide. The short put/call strikes are 109 and 132.
The probability of success for the trade = 85%.
This means that with SPY trading at $121.50 on Nov. 21, it would have to breach the 109 or 132 level by Dec. 16, the day of December options expiration.
It would take an 8.7% move to the upside or a 10.2% move to the downside over a four-week period before the position is in jeopardy of taking a loss.
Best of all, the strategy will make 12.6% over the four-week period if it closes within the established range by December expiration.
When the market is going nowhere fast, the Iron Condor provides safe returns that you can capture month after month, with very little risk.
- Long and Short Ideas
- Market Commentary
- Top Stocks
- Wall Street Follies