Options Trade of the Day: SPDR S&P 500 ETF Reverse Iron Condor

By
A A A

Volatility has been the name of the game on Wall Street during the past several weeks, with the S&P 500 Index (SPX) bouncing around in a 54 point range since the beginning of November. While volatility can be an options trader's best friend when the market is trending in a single direction, the sideways volatility we continue to see on Wall Street can be maddening for even the most hardened trader. Luckily, due to the diversity of options, there are solutions for this predicament, such as the reverse iron condor .

SPY weekly chart

The Anatomy of a SPDR S&P 500 ETF Reverse Iron Condor

It just so happens that one entrepreneurial options trader entered just such a trade on SPDR S&P 500 ETF ( SPY ) earlier today. For reference, the SPY is an exchange-traded fund ( ETF ) that is designed to correspond to the price and yield performance of the SPX.

At about 9:32 a.m., a block of 677 December 113 puts were sold for the bid price of $0.01, while a block of 677 December 114 puts were purchased for the ask price of $0.03. At the same time, a block of 677 December 122 calls traded for the ask price of $0.28, while 677 December 123 calls were sold for the bid price of $0.06. If this sounds convoluted, see the table below for a bit of clarity.

SPY Reverse Iron Condor details

As you can see, the trade is basically the combination of a bull call spread and a bearish put spread. The objective is for SPY to close at or below the 113 strike, or at or above the 123 strike, when December options expire. When this happens, the sold strikes will be worthless, while either the purchased 122 call or 114 put will be one point in the money (while the other will expire worthless). Since the total cost of entering the trade comes to $0.24, the maximum profit received on this trade is $0.76 -- $1 - $0.24 = $0.76 -- or $76 per set of contracts. Check out the chart below for a profit/loss breakdown:

SPY reverse iron condor profit/loss chart

Implied Volatility

After entering a reverse iron condor, rising implied volatility is pretty much neutral to the overall position, as it lifts the value of both the sold options and the purchased options. At the time of the trade, implieds for the December 113 put were 56.93%, and 58.91% for the December 114 put. Meanwhile, implied volatility for the December 122 call was 23.21%, and 21.20% for the December 123 call. For a point of reference, SPY's one-month historical volatility was 16.59% as of the close of trading on Wednesday.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.


This article appears in: Investing , Options

Referenced Stocks: ETF , SPY

Schaeffer's Investment Research

Schaeffer's Investment Research
  • See all for Schaeffer's Investment Research
  • View Print Version

More from Schaeffer's Investment Research:

Related Videos

Quick on Your Feet
Quick on Your Feet                  
Early Entrepreneurship
Early Entrepreneurship              

Stocks

Referenced

100%
61%

Most Active by Volume

48,099,947
  • $16.09 ▲ 0.50%
40,277,806
  • $102.50 ▲ 0.24%
40,236,499
  • $19.57 ▲ 2.35%
31,092,510
  • $49.75 ▲ 0.65%
30,795,218
  • $34.92 ▲ 0.78%
29,910,855
  • $3.63 ▲ 0.83%
24,019,154
  • $13.06 ▼ 0.38%
23,753,906
  • $74.82 ▲ 1.31%
As of 8/29/2014, 04:04 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com