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Iron Condor to Circle Range Bound Market


Names that have iron condor potential include IBM and SPY.

MINYANVILLE ORIGINAL The great wait for many potential catalysts -- from the Jackson Hole meeting to the September jobs report to whatever elections and summits the eurozone will engage in -- has provided a nice excuse for investors to keep both eyes shut during the waning days of summer. And now with Mario Draghi cancelling his appearance at the summit, it seems all the more likely that there will be no Earth-moving announcements. Let's leave the itchy trigger fingers to Knight Capital's (KCG) computers. I just want to kick back and get some passive income while this market remains range bound.

For an options trader, that means selling premium. That might entail selling both puts and calls to create a strangle or straddle . But these positions involve selling options "naked," which means that the risk is unlimited and the margin requirement is often prohibitively high. To get that margin clerk off your back, and button up risk, use an iron condor strategy.

An iron condor consists of simultaneously selling both a call spread and put spread that have the same expiration date. The position has a maximum profit of the amount of premium collected. The maximum loss is limited to the width of the spreads minus the premium collected.

With many listings having weekly options, it is a great way to get time on your side and profit from time decay. Let's look at the broad SPDR S&P 500 (SPY) for an example. With the SPY trading at $141.50, one could sell the 138/140-142/142 condor for a $0.65 net credit.

Here is what it looks like:

- Sell August $140 puts at $0.38 per contract.

- But August $138 puts at $0.08 per contract.


- Sell August $142 calls at $0.40 per contract.

- Buy August $144 calls at $.0.06 per contract.

As you can see, this sale of two of-the-money spreads (both puts and calls) gives you net credit of $0.64, which will be the maximum profit if the SPY is between $140 and $142 by this Friday. The maximum loss of $1.37 would be incurred if shares of SPY are below $138 or above $142 on this Friday's expiration. Given that we are still in extreme no-participation, low-volume, low-volatility mode, I like the chances of the market remaining range bound.

This is clearly a time and volatility play. As a probability that has a defined risk and reward, an iron condor should usually be held until expiration. Unlike a long position that can be rolled to more favorable strikes, adjustments to an iron condor usually mean you are whittling away at profit potential or even locking in a loss.

Some names that have iron condor potential include IBM (IBM), which also has weekly options, and should stay between $195 and $200 for the next few days. This stock offers the chance for an iron condor using the 190/195-195/200 strikes for a $2.35 net credit.

Iron condor profits come from the slow and steady income generated through time decay. It may not be the most exciting way to make money, but neither is owning a 10-year bond that earns 1.65% per year.

Twitter: @steve13smith

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No positions in stocks mentioned.

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