At the onset of 2017, I introduced a new portfolio to my Options Advantage service, based on iron condor trades. So far we’ve been able to reap an average of 8.8% per trade, for a return on capital of 37%.
As you might guess, I’ve been proud and more than pleased with the results so far. Not only are we making profits, but many subscribers are learning a new and powerful strategy to enhance the returns on their overall portfolio.
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, or probability 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 $242 and $218.
The underlying SPY is trading for $233.62 and I would like to establish an iron condor for May expiration. That’s a 3.6% cushion to the upside and 6.7% to the downside over 53 days…although my average days per trade since initiating the iron condor portfolio is 24 days.
Here is a theoretical trade based on the previous chart:
Sell to open SPY May 242 calls
Buy to open SPY May 244 calls
Sell to open SPY May 218 puts
Sell to open 175 May 216 puts for $0.40.
How did I select this trade…probabilities.
Call side of the Iron Condor:
Put side of the Iron Condor:
I wanted to choose an iron condor trade with a probability of success around 85% which is why I sold the 218 calls and 242 puts.
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 24 points (242-218) and SPY trading for $233.62 and again, the underlying ETF can move higher 3.6% or lower 6.7% over the next 53 days before the trade is in jeopardy of taking a loss.
The strategy will make 25.0% if it closes within the established range by May expiration. As I said before, I prefer to take trades off early and lock in profits when the price of my original premium is about 50% less than when I initiated the trade. For example, since we sold the iron condor $0.40, I would look to take off the SPY trade when premium pushes to roughly $0.20.
When the market is going nowhere, the Iron Condor provides safe returns that you can capture month after month.
There is a good reason it is one of my favorite, if not my favorite, options strategy. As options traders we have a huge advantage over other typical stock-only investors because we 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.
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Source: Wyatt Investment Research