SPY Iron Condor
Has the market been volatile this year? Yes. But it's also been range bound. The SPY has traded between about $126 and $136 basically all year. Is there a way to profit from this observation? As Sarah Palin would say, you betcha!
The way to profit from a range-bound asset is somewhat complicated, however, can be easily approachable with a little guidance. The strategy today is an iron condor. And iron condor is a four-legged spread in which a trader buys a put, sells a higher-strike put, sells a yet higher-strike call and then sells and even higher-strike call.
The trade is the SPY Aug 124-126-136-138 iron condor sold at 0.70. Specifically, a trader trading this spread would:
Buy the SPY Aug 124 puts,
Sell the SPY Aug 126 puts,
Sell the SPY Aug 136 calls, and
Buy the SPY Aug 138 calls
all for a total of a 0.70 credit.
Because this trade is established for a credit, the objective is for all options in the spread to expire, making the profit at expiration the entire 0.70 premium collected. This is achieved if SPY is between $126 and $139 by August expiration. In that case, all options would be out-of-the-money and would thus expire.
The risk is if SPY moves too much in one direction or the other. If SPY falls too much, the 126 puts may be at risk of being assigned leading to a long position in SPY. Risk below $126 is limited because of the 124 puts. They prevent losses from accumulating below that strike. If SPY rises too much, the 136 calls run the risk of being assigned, leading to a short position in SPY (which loses value as the ETF rises). That loss is truncated by the 138 calls. They limit losses above the 138-dollar mark.
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