Generate Income from a Range Bound Stock (X)

Iron Condors (what a cool name for an option strategy!) are great plays to take advantage of falling implied volatility. Since you are net short (trading it for a credit) 4 different options they all lose value when volatility drops generating a quick profit for you.

Besides taking advantage of falling volatility, Iron Condors are also great for range bound stocks with stable volatility. Iron Condors are neutral plays setup to take advantage of a range. If the stock remains in that range it will earn profit as each day passes.

US Steel Corp X has been trading in a range since April. Yesterday it closed at 18.20 which is the price it opened at on 4/2/13, that is the definition of a range bound stock.

Looking at the volatility we see implied volatility (red line) at a stable level, moving sideways. Realized volatility (blue line) is trading below implied volatility which means this is a great time to initiate an Iron Condor trade.

The trade we are looking at is the 16/17/19/20 October Iron Condor. That means we are buying the 16 put, selling the 17 put, selling the 19 call, and buying the 20 call. This will place our breakevens at 16.45 and 19.55 which sits outside of our range.

We are looking at receiving a credit of .55 per lot and using .45 in margin. Ideally we want to close out this trade at the end of September and lock in at least 30% of our credit. This would generate us a 35% return on margin which isn't bad for a month hold.

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