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There is one simple options 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:
+11.1%… on 11/22/16
+25.8%… on 10/24/16
+15.6%… on 9/23/16
+17.0%… on 9/9/16
+3.3%… on 6/17/16
+13.0%… on 6/13/16
+14.3%… on 5/25/16
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 this simple options strategy is easier to understand in the chart below. But the key part, and the real advantage of this trade, is this:
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 $228 and $208.
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:
Simultaneously:
Sell to open SPY January 228 calls
Buy to open SPY January 230 calls
Sell to open SPY January 208 puts
Buy to open SPY January 206 puts for $0.46.
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 80% to 85%, which is why I sold the 228 calls and 208 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 20 points (228-208) and SPY trading for $220.58, the underlying ETF can move higher 3.4% or lower 5.7% over the next 59 days before the trade is in jeopardy of taking a loss.
The simple options strategy will make 29.9% if it closes within the established range by January expiration, but I typically take off the spread long before expiration to lock in early profits.
When the market is going nowhere fast, the iron condor provides safe returns that you can capture month after month.