Credit: Shutterstock photoThere is one simple strategy to make money in this sort of range-bound market. It's a strategy that beats both the bulls and the bears time and time again, and it's called the 'Iron Condor'.
Options traders have a huge advantage over other typical stock-only investors because they can use strategies that generate profits regardless of market direction. Simply stated, iron condors, when properly structured, can even absorb fairly large directional moves and still generate impressive profits.
Over the last six months we've made the following profits using iron condors:
+16.20% … on 12/20/13
+19.70% … on 11/15/13
+19.00% … on 11/15/13
+20.40% … on 8/16/13
+19.70% … on 7/17/13
So 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 is:
You choose the price range of the trade. Increasing the range will decrease your potential profits, but will increase your likelihood of success.
Here is an example of a typical Iron Condor trade.
The blue lines define how far the S&P 500 ( SPX ) can move up/down before the position I am interested in pursuing is in jeopardy of taking a loss. You can clearly see that this range is from $195 and $177.
The underlying SPY is trading for $188.39 and I would like to establish an iron condor for April expiration.
Here is the theoretical trade:
Sell to open SPY April 195 calls
Buy to open SPY April 197 calls
Sell to open SPY April 177 puts
Sell to open 175 April 175 puts for $0.28.
How did I select this trade…probabilities.
Call side of the Iron Condor:
Put side of the Iron Condor:
Again, it's all about the probabilities when selling options. The higher the probability of the trade the less premium you are able to bring in, but I tend to side with the odds which is why I typically choose a higher probability of success with each and every trade I make.
So, with a range of 18 points (195-177) and SPY trading for $188.39, the underlying ETF can move higher 3.5% or lower 6.0% over the next 40 days before the trade is in jeopardy of taking a loss.
The strategy will make 16.3% if it closes within the established range by April expiration.
When the market is going nowhere fast, the Iron Condor provides safe returns that you can capture month after month.
Again, I use it myself.
My #1 Strategy for Earning 10% a Month!
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
