My Favorite Options Strategy for the Next 6 Months

An iron condor strategy is a non-directional options strategy that profits when the option on the underlying stock or exchange-traded fund of your choice expires within your chosen range at expiration.

The basic premise of the strategy is easy. You choose the price range of the trade. Increasing the range will decrease your potential profits, but will increase your likelihood of success.

The first requirement when trading iron condors is to make sure you are using a highly liquid security, in most cases an ETF. Highly liquid, in the options world, just means that the bid-ask spread is tight, say within $0.01 to $0.05, at least in most of the ETFs I trade.

For instance, take the heavily traded SPDR S&P 500 ETF (NYSEArca: SPY).

The ETF was recently trading for $206.56.

iron condor income strategy

SPY is just one of 50 to 60 ETFs that is considered “highly liquid” among most options traders. I focus my attention on roughly 30 of those ETFs.

I then move on to my mean-reversion indicator, otherwise known as RSI.

RSI can be seen at the bottom of the SPY chart above. You’ll notice peaks (overbought) in green, and valleys (oversold) in red. I typically want to place a trade when the indicator is in between those areas. It’s called being in a neutral state, but I’m going to offer a slight variation to the strategy today due the bearish nature of the current market. I’ll get to that soon.

An appropriate implied volatility rank and implied volatility percentile is also needed.

Without going into great detail (I’ll save that for my upcoming webinar, click here for details) the IV rank and IV percentile simply tells us if the implied volatility is high or low in the highly liquid stock or ETF that we want to trade.

If it’s normal to high, we want to trade it. Of course, there are a few exceptions, but I’m not going into the details here. I’ll save that for another time.

A normal-to-high IV rank and percentile just means we can sell options for fair-to-inflated prices. And as anyone who sells anything for a living, your preference is to always sell your product for inflated prices. Options are no different.

Typically this type of setup occurs when a security moves from an oversold state back into a neutral state. When a security is oversold, it has trended lower, and as a result, fear has increased. The increase in fear inflates the price of the option, because more investors are buying options for protection. And that’s the reason why prices are skewed slightly higher for put options.

So, assuming SPY’s implied volatility is at least slightly above historic volatility, we can proceed to the next step: choosing your return.

Again, SPY is trading for roughly $206.

I typically like to start with a trade that has a probability of success around 80%, if not higher. But I use 80% as my starting point.

First I look at the call side of the iron condor, also known as a bear call spread. I want to find the short strike with an 80% probability of success.

SPY options chain

The June 213 calls fit the bill, as it has an 81.53% probability of success.

Next I take a look at the put side with the same goal in mind: a probability of success of 80% or higher. However, since I am little bearish on the market I want to increase my probability of success slightly. I’ll have to forgo some of my potential return to do so, but it’s a reasonable approach given my view on the market.

SPY options chain

At 84.41%, the June 192 puts work. If I were to go with my typical 80% probability of success I would need to sell premium on a strike that is closer to the current price of the ETF. But again, in this example I want to take a more conservative approach, so adding a margin of error of $2 to increase my probability of success by 4.41% is worth forgoing an additional premium on the iron condor trade.

So, right now I have my starting range of $213 and $192 established. Obviously, I can alter it as needed, but first I want a good base for my iron condor trade.

What’s the Return?

By selling the 213/215 bear call spread and the 192/190 bull put spread simultaneously – thereby forming an iron condor – you can make $0.58, or 40.8%, over the next 43 days.

iron condor income strategy

Again, with SPY trading at $206.56, the liquid ETF would have to breach the break-even levels of $213.58 or $191.42 by June expiration before the trade begins to take a loss.

It would take a 3.1% move to the upside or a 7.0% move to the downside over roughly a six-week period before the position is in jeopardy of taking a loss.

Best of all, the probability of success on the trade is a staggering 81.53% on the upside and over 84.41% on the downside. I like those odds.

I typically manage the trade by taking a loss if the spread increases to around $1.00-$1.20, roughly double the premium sold. I want to keep my losses small, knowing that I can make up for the loss if all goes well in the next trade.

Remember, we are trading math here. It’s all about allowing the probabilities to work themselves out, so we want to try to keep losses to a minimum, knowing that if the statistics play out, our wins should far outweigh our losses.

Again, if you wish to learn more about how I trade iron condors, check out my upcoming webinar.

Published by Wyatt Investment Research at