Several successful options-based newsletter services use the Short Iron Condor strategy as their “bread and butter” trading strategy. They disguise it by calling it other names or say it is a proprietary model/formula that they have created, when in fact the Short Iron Condor strategy is mentioned in most of the prominent options strategies texts.
We absolutely love the Short Iron Condor strategy (for several reasons I will mention below), and we hope after you read the information below you will find it useful as a tool in your investment belt. We offer a unique way of utilizing this strategy and best of all, it is simple to use. You will be equipped with all the information you need in order to make the most informed decision possible. We have done all the research; all you have to do is place the trade.
You may read some of our trading guidelines below as well as a sample trade that was published in our newsletter ahead of the December option expiration cycle.
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Advantages of the Short Iron Condor Strategy – Crowder Style
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The strategy is a credit spread which means time decay is your friend. Most options traders lose value as the underlying index moves closer to expirations. This is not the case with the Short Iron Condor strategy, as the underlying SPX moves closer to expiration and remains in our chosen range, the strategy makes money.
2. The strategy is a one-month trade (expiration to expiration) that does not require constant monitoring off the market.
3. The strategy works in all market conditions (bull, bear, directionless). However, the best scenario would be a directionless market.
4. Can make 4% to 14% a month.
5. Uses the tracking stock for the Standard and Poor 500 stock index (SPX), the 500 largest and most stable companies as the underlying.
6. The strategy enables you to determine your potential profit/loss and risk/reward before the trade is placed.
7. If the underlying SPX closes within the chosen range at expiration, your pre-determined profit is made.
8. Section 1256 tax advantage
Sample Trade from December
The December option expiration cycle marks the first official trade in our Short Iron Condor strategy. We have decided to use SPX, the tracking stock for the S&P 500, as our underlying for this particular strategy for various reasons.
Options on SPX are considered a European style option, which means that they are cash settled at the opening price of SPX on the third Friday of each month (options expiration). This saves in the exit commission cost. Furthermore, they are not subject to early exercise. European style options may be sold at any time; however, you may not exercise them before expiration.
The December option cycle is a four week cycle which is highly preferred when using the Short Iron Condor Strategy as it allows less time for the underlying to move outside of the chosen range.
Position
The price of SPX at the close of options expiration is 1399.76. Our range choice is 100 points. We want to be as neutral as possible in when choosing our range.
Our trade:
Sell to open SPX Dec06 1445 calls Buy to open SPX Dec06 1455 calls
Sell to open SPX Dec06 1345 puts Buy to open SPX Dec06 1335 puts
Total net credit - $1.20 per SPX Short Iron Condor
• Lower break-even = sold put strike – total net credit
= 1345 – 1.20 = 1343.80
• Upper break-even = sold call strike + total net credit
= 1445 + 1.20 = 1446.20
Now we can calculate percentage returns, maximum profit, maximum risk, and break-even levels to see if the trade fits our investment objectives.
1. First let us figure out our margin for the trade. Since we have 10 points between our long and short strikes we can assume the following.
Margin = (difference between the short and long strikes – total net credit)*100
= (10 – 1.20)*100
= $880 per SPX Short Iron Condor
2. Now we can go ahead and calculate our maximum profit on the trade including commissions. It is assumed our commission is $1.50 per contract and since an Iron Condor requires 2 spreads (bull put spread and bear call spread), at least 4 contracts are needed or $6.00 per Iron Condor. Basically, the maximum profit per trade is the premium that you collect for selling the bear call spread (short call vertical) and bull put spread (short put vertical). The max profit occurs if SPX closes between (1345 - 1445).
Max Profit = (total net credit*100) – commission
= (1.20*100) – 6.00
= $114.00 per SPX Short Iron Condor
3. The next step would be to figure out our maximum loss. The maximum loss occurs if the SPX exceeds the lower or upper breakeven points calculated above.
Max Loss = margin + commissions
= $880 + 6.00
= $886.00 per SPX Short Iron Condor
4. Lastly our percentage return including commissions is:
Percentage return = (max. profit/max. loss)*100
= ($114.00/886.00)*100
= 12.9% on the trade
While this is a fairly conservative strategy as options strategies go, as you can see by the max loss the potential for a big loss is possible, especially if the market moves sharply in one direction in a short period of time. In most cases, the spreads can be rolled up/down to widen the range, so the max loss is somewhat deceiving, but you must be aware that a max loss is possible and should be considered when utilizing this strategy. Diversify! Never put all of your eggs in one basket.
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Have a great night!
Andrew Crowder, Chief Investment Strategist,
www.crowderinvestments.com