More Iron

02/19/2014

No, not another heavy metal band. I want to talk about another strategy that profits from a range bound market, the Iron Condor (although, now that I think about it Iron Condor would be a great name for a rock band).

Iron Condor Chart

 

 

 

 

 

 

Basically, the strategy calls for being short an OTM vertical call and an OTM vertical put spread. The strikes are equidistant and the stock or index should be right in between the two spreads to be directionally neutral.

How we determine what spreads to sell? We let the market tell us. The at the money (ATM) straddle gives us our Measured Move Targets (MMT). Let's move on to a real time (9:30 CST) example using Google (GOOG).

With GOOG trading at 1204 we'll use the 1200 straddle to give us our MMT. The 1200 March straddle is trading at 43. This gives us MMT of 1155 and 1245. So we'll sell the 1155 put at 8.75 and the 1245 call at 9.50. For protection we buy the 1130 put at 4.75 and the 1270 call at 5. The entire position gives us a net credit of 8.50 which we make on any GOOG March expiration between 1155 and 1245. Our worst case scenario is an expiration below 1130 or above 1270 which would cost us 17.50. There are two break even points, 1146.50 and 1253.50.

Basically, the premise of this Iron Condor is that GOOG will expire in March with roughly a 9% range.

Randall Liss, The Liss Report