Strategy – Iron Condor
Underlying Asset – RUT (Russell 2000 index)
“Iron condor” involves selling a OTM (Out of the Money) call and put option of a underlying stock and buying further out (most often the next strike price) OTM call and put option for protection.
Beautiful thing about this strategy is that you don’t have to predict the direction of the underlying security. Doesn’t matter which redirection it goes in a short term (up, down or sideways), you can still be profitable. It’s more like predicting a range of price movement rather than predicting the direction.
RUT (Russell 2000 – small cap index) closed at $1403 on Wednesday 28 June 2017 and a Sell signal day flashed with some of the technical indicators I use, meaning prices ready to have short time pull back after resisting $1420 level from Monday 19 June. As you can see in the chart RSI and MACD Histogram, both pointing same direction, downwards (green arrow in the chart). Also, between 23, 26 & 27 June prices formed a “morning star” candlestick pattern which is bearish. On 28 June RUT opened near the button of the previous days candle and was hanging around $1406 mark with small body for a while and that’s when I have decided to take the trade as per below. These are weekly options expiring Friday 30 June.
| Side | Quantity | Symbol | Expiration date | Strike price | Type |
| SELL | 10 | RUT | 01-July-17 | 1445 | CALL |
| BUY | 10 | RUT | 01-July-17 | 1450 | CALL |
| SELL | 10 | RUT | 01-July-17 | 1350 | PUT |
| BUY | 10 | RUT | 01-July-17 | 1345 | PUT |
After taking the trade on Wednesday 28 June, prices took off and had pretty strong upwards move though. You will notice, put option strike prices were way down compared to the call option strike prices which were much closer to the current prices as prices generally falls aggressively when it falls. Both call and put strike prices were outside the Bollinger band and recent highs and lows. And that makes the trade pretty safe.
Received $0.15 credit per share in my account with selling and buying all these option contracts and that’s my profit if successful with the trade. As long as the prices stay in between $1350 and $1445, these option contracts wouldn’t have any value after close of trading 30 June 2017 and expire worthless. Risk to reward ratios is not attractive to this kind of trades, but it is compensated by the probability of success. When taking this trade, the statistical probability for prices to not hit those strike prices was above 90% ($1445 strike price ITM probability was approximately 93% and $1350 strike price ITM probability was approximately 97%). So, that’s 93% chances that the trade will be successful, only 7% chance that you may loose. That’s a pretty good odd I say.
If trades go bad due to some extreme news or something, risk is that you may loose some of the capital invested. And if you can manage these trades well, very often you ended up making more money then initially planned. That’s where expertise, skills and experiences comes in. And like any other skills, it can be learned and developed.
Capital requirement to do this trade was $5000 and have received $0.15 credit per share.
| Capital requirement | $5,000 | 10 contracts, each options contract consist of 100 shares, $5 spread between strike prices (10 x 100 x $5 = $5000). Prices can either go up or down at one time, so capital required to do the entire trade based on only either CALL or PUT options. |
| Net profit | $113.05 | ($0.15 x 100 x 10 – $36.95 commission = $113.05 |
That’s 2.26% return on the capital invested in 3 days.
P.S Please note that the trade is now closed. Do not copy and place a trade unless you are an expert and know what you are doing. This writing is only for educational purposes. Trading is risky without proper knowledge, practice, expertise and mentorship.