Introducing – SPX Short Iron Condor

You may read some of our trading guidelines below as well as a sample trade that was published in our newsletter ahead of the December option expiration cycle.

Advantages of the Short Iron Condor Strategy – Crowder Style

1.The strategy is a credit spread which means time decay is your friend. Most options traders lose value as the underlying index moves closer to expiration. This is not the case witht he Short Iron Condor strategy, as the underlying SPX moves closer to expiration and remains in our chosen range the strategy makes money.

2. The strategy is a one-month trade (expiration to expiration) that does not require constant monitoring off the market.

4. Can make 4% to 14% a month.

5. Uses the tracking stock for the Standard and Poor 500 stock index (SPX), the 500 largest and most stable companies as the underlying.

6. The strategy enables you to determine your potential profit/loss and risk/reward before the trade is placed.

7. If the underlying SPX closes within the chosen range at expiration, your pre-determined profit is made.

8. Section 1256 tax advantage

Sample Trade from December

Position

The price of SPX at the close of options expiration is 1399.76. Our range choice is 100 points. We want to be as neutral as possible in when choosing our range.

Our trade:

Sell to open SPX Dec06 1445 calls Buy to open SPX Dec06 1455 calls

Sell to open SPX Dec06 1345 puts Buy to open SPX Dec06 1335 puts

Total net credit – $1.20 per SPX Short Iron Condor

• Lower break-even = sold put strike – total net credit

= 1345 – 1.20 = 1343.80

• Upper break-even = sold call strike + total net credit

= 1445 + 1.20 = 1446.20

Now we can calculate percentage returns, maximum profit, maximum risk, and break-even levels to see if the trade fits our investment objectives.

1. First let us figure out our margin for the trade. Since we have 10 points between our long and short strikes we can assume the following.

Margin = (difference between the short and long strikes – total net credit)*100

= (10 – 1.20)*100

= $880 per SPX Short Iron Condor

2. Now we can go ahead and calculate our maximum profit on the trade including commissions. It is assumed our commission is $1.50 per contract and since an Iron Condor requires 2 spreads (bull put spread and bear call spread), at least 4 contracts are needed or $6.00 per Iron Condor. Basically, the maximum profit per trade is the premium that you collect for selling the bear call spread (short call vertical) and bull put spread (short put vertical). The max profit occurs if SPX closes between (1345 – 1445).

Max Profit = (total net credit*100) – commission

= (1.20*100) – 6.00

= $114.00 per SPX Short Iron Condor

3. The next step would be to figure out our maximum loss. The maximum loss occurs if the SPX exceeds the lower or upper breakeven points calculated above.

Max Loss = margin + commissions

= $880 + 6.00

= $886.00 per SPX Short Iron Condor

4. Lastly our percentage return including commissions is:

Percentage return = (max. profit/max. loss)*100

= ($114.00/886.00)*100

= 12.9% on the trade

While this is a fairly conservative strategy as options strategies go, as you can see by the max loss the potential for a big loss is possible, especially if the market moves sharply in one direction in a short period of time. In most cases, the spreads can be rolled up/down to widen the range, so the max loss is somewhat deceiving, but you must be aware that a max loss is possible and should be considered when utilizing this strategy. Diversify! Never put all of your eggs in one basket.

IWM - 50.2 (neutral)

QQQQ - 44.6 (neutral)

OIH - 67.1 (neutral)

GLD - 44.6 (neutral)