It was not a good day for the market.
The SPDR S&P 500 ETF (SPY) fell 2.24% today as fears over the outlook for global growth mounted after weak manufacturing data from Germany and China. At least that is what the talking heads would have you believe. If anything I think the Federal Reserve’s announcement to extend Operation Twist has more to do with the sharp decline. But ultimately, the news doesn’t matter, it’s all about your investment strategy, but I will get to that later.
SPY has managed to climb 5.4% over the past 15 trading days and had pushed into a short-term overbought state, so at least a short-term reprieve was expected. Furthermore, the major market ETF had pushed up against what has been strong overhead resistance at the $135.00 level.
As the market moves into the “summer doldrums” I expect to see continued selling particularly over the next few weeks. A push to close the gap from 6/6 or $128.59 should be the first stop which also coincides with the 200-day moving average.
So, given the assumption above what would be a good way to take advantage of the current malaise in the market.
In a sideways market, there are several strategies that can be utilized, but my favorite is the iron condor.
An Iron Condor strategy is a non-directional options strategy that profits when the option on the underlying stock or ETF 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.
Earlier in the week, I wrote an article about how to use an iron condor strategy in Apple. Basically, my assumption was the Apple would remain range-bound and my assumption is the same for the overall market.
I want to start out the trade by choosing my probability of success.
The probability of success for the trade = 85%.
This means that with SPY trading at $132.50 on June 21st and a goal of 85% on the trade we can create a range between 136 and 123.
Basically, SPY would take a 4.2% move to the upside or a 7.1% move to the downside over the next 29 days before the position is in jeopardy of taking a loss.
Best of all, the strategy will make 18.3% over the four-week period if SPY closes within the established range by July expiration.
When the market is going nowhere fast, the Iron Condor provides safe returns that you can capture month after month – with very little risk.
I use it myself, and I will use it in my real money Options Advantage portfolio.
If you have any questions please do not hesitate to email me at [email protected].
Editor and Chief Options Strategist
Options Advantage and The Strike Price