At The OptionWiz, we combine stock selection with options strategies for our customers. Applying the right options strategy for a specific scenario makes the difference between a losing or winning trade.
As we come to the conclusion of earnings season, options of stocks that have already reported tend to drop in volatility. This is a good opportunity to apply an IRON CONDOR.
The Iron Condor options strategy is used when a trader believes that a security will remain within a trading range for a specified period of time.
This is a sophisticated options strategy that requires buying and holding 4 options with different strike prices, but the same expiration date. There are two ways to explain how an iron condor is structured:
Explanation #1: An iron condor is a combination of two different strangle strategies. A strangle requires purchasing or selling a call option and a put option with different strike prices, but the same expiration date. There is limited loss and gain on this trade because the trader puts an offsetting strangle around the two options that make up the strangle at the middle strike price.
Explanation #2: An iron condor is simply the combination of a vertical bear call spread and a vertical bull put spread. This is our preferred explanation. A vertical bear call spread involves selling a call option and buying a further out of the money call option for a net credit. A vertical bull put spread involves selling a put option and buying a further out of the money put option for a net credit.
Structured correctly, Iron condors can afford the trader both a high probability and flexible trade. They are high probability because they are non-directional and take FULL advantage of the fact that 77% of all options expire worthless. The key to properly structuring an iron condor is to determine a trading range for the stock for the chosen time period. An additional benefit of the iron condor is that if the stock does happen to trade outside of the trade's range, you have the option of going long the stock either at your short put strike (if the stock is under the short put strike at expiration) or buying the stock to cover the short call.
Here's a sample iron condor trade:
Stock / Symbol: Market Vectors Gold Miners ETF / GDX
Last Price: $43.02
Reasoning: The odds of GDX trading at/under $38 by June expiration are only 17%, and the odds of it trading at/over $48 by June expiration are only 15%. Therefore, this trade has an 83% probability of success.
Trade Details:
STO 1 GDX Jun12 48 call
BTO 1 GDX Jun12 49 call
STO 1 GDX Jun12 38 put
BTO 1 GDX Jun12 37 put
for a net credit of $0.20 per contract (current bid $0.19 / ask $0.26)
Max Risk: $80
Max Reward: $20 or 25% by Jun 15
Profit Range: between $37.80 and $48.20 by Jun 15
Max Profit: between $38 and $48 by Jun 15
Suggested downside stop: $38
Suggested upside stop: $48
Note: increase the number of contracts equally on each leg till you reach your desired risk / reward level.
Here's to smart Trading,
The OptionWiz
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