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
.
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.
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:
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.