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The Advanced Traders Page
The Iron Condor
The first step to this trading strategy is to pick the underlying commodity. In this example, we'll use a U.S. Treasury Bond. About ten days prior to the expiration of our target bond option, we make a decision as to were the market will be at expiration. We're looking for a range as opposed to an exact number. We then sell both a call and a put (a straddle), at the strike price closest to our target price. This puts money in your account in the form of the premium paid for the options you sold. We then take some of those received funds and purchase both a call and a put (a strangle) 2 full points on either side of our straddle. This is our insurance policy and helps reduce some of the risk. Then we sit back and wait until the tens days are up. If the market is close to our target (within our range) we profit. If we're off the target completely, we lose.
The Iron Condor is not new. In fact, it has been used on trading floors across the globe for many years. Timing in a critical factor in using the Iron Condor. In the case of bonds, we find that they tend to be volatile for two weeks and then calm for two weeks. To use this trading strategy successfully, you need to execute your straddle at the right time, otherwise you'll end up on the losing side of the trade. The volatile period tends to be at the end of the month due to large position turnovers and government announcements. Let's review
The trade consists of selling an options straddle at the middle of the expected trading range which is our target for expiration. We then use some of our profits from the premium to purchase a strangle (buying both a call and a put) two basis points on either direction of the straddle we sold. Remember, this is our insurance policy
We do the straddle and strangle at the same time, putting a credit into your trading account. This credit can be anywhere from $1,100.00 to $1,700.00 depending on the underlying volatility. If you want to receive more information about this and other trading strategies, e-mail us at HThmPttrsn@aol.com.
There is a risk of loss in commodities, futures and options trading