After taking a tumble in March Gold (NYSE: GLD) has been trading in a fairly tight-range over the past two months.
Will it continue its sideways price action, or will the commodity ETF move higher or lower over the next month?
Does it matter? And can we truly answer such a question with a definitive answer anyway?
As an options trader and a self-directed investor I really don’t care. I only care about growing my portfolio through income generating strategies.
But let’s get back to Gold.
As I stated before Gold has traded in a fairly tight range (160-148) after its short lived rally in early June.
So, how can we take advantage of the stagnant price action?
Look no further than a range-bound trade/investment known as an 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.
So, if GLD has been trading between 160 and 148 over the past few months and we think it will stay around that area over the next 25 days we can place an iron condor trade.
In fact, we can increase the range significantly say 162-143, a 19 point range and still make 12.0%.
This means that with GLD currently trading at $152.50, the liquid commodity ETF would have to breach the breakeven levels of $162.24 or $142.76 level by July 21st (23 days) before the trade begins to take a loss.
It would take a 7.0% move to the upside or a 6.4% move to the downside over a four-week period before the position is in jeopardy of taking a loss.
Best of all, the probability of success on the trade/investment is a staggering 90%. Yes, that means that there is only a 10% chance that GLD will move outside the $162.24 – $142.76 range over the next 23 days. I like those odds.
When the market is going nowhere fast, the Iron Condor provides safe returns that you can capture month after month – with very little risk.
If you have any questions about the intricacies of the strategy or using probabilities of success as a way to trade/invest please feel free to email me at [email protected], and follow me on Twitter at @OptAdvantage.