Before I begin, I want to invite you to my upcoming free webinar, “The Power of Iron Condors: Top Options Strategy for Earning 5% to 10% with Each Trade,” this Thursday, April 16 at 12 p.m. EDT. I will discuss one of my favorite income strategies, known in the options world as an iron condor. It’s a relatively conservative income strategy that thrives in range-bound markets.
If you are interested in learning more about iron condors and how you can implement them in your overall income strategy, please make sure to sign up for my upcoming webinar. There you’ll see options explained with real-time trades, and you’ll learn why options are essential to becoming a well-rounded, successful investor.
It’s rare for the S&P 500 to move 8%, 7% or even 6% in one direction over the course of one or two months.
If we, as self-directed income investors, know the aforementioned fact, why do we sit on our laurels during these times of complacency? Why do we not take advantage of tools that will help us achieve a stream of conservative short-term returns while we wait to collect dividends or lock in capital gains?
When we look at the performance of the S&P 500 over the short term – say every 30 days – the major market benchmark typically just chops around sideways, not making any significant directional moves.
As you can see, September and November bookend the range of average return and neither have an average return above or below 2%.
So, in theory, if we make a short-term trade creating a range that exceeds 2% on the upside and downside we should be okay, right? Could it really be this easy? Well, let’s take a look.
The Iron Condor
The SPDR S&P 500 ETF (NYSEArca: SPY) is up 2.1% year-to-date and has been range-bound for the last two months.
Will the benchmark ETF continue to move sideways, or will it move higher or lower over the next month, two months, or even a year?
Does it matter? And let’s be honest with ourselves, can we truly answer such a question with a definitive answer?
As options traders, we really don’t care where the market is headed as long as it doesn’t move sharply over a period of 30-50 days. Fortunately for those of us who use the iron condor strategy, we know for a fact that the S&P 500 moves less than 2% per month on average.
We cast a large net of sorts around that range every 30 days or so because we know that we are going to catch the majority of future price movements. There is absolutely no bias as to whether a stock or ETF will go up or down. We aren’t taking the crystal ball approach, guessing where a security is headed. We simply play the odds.
It sounds like an easy approach, right? We just wrap a range around the current price of a security, whether it’s the benchmark S&P 500 ETF or Apple (NASDAQ: AAPL), and if the security trades within our chosen range over the duration of our 30-day trade we make 5% to 10%. Fortunately, it IS an easy strategy to learn, but like any investment it comes with risks. Remember, nothing is free in the world of investing.
But, this is why I am having a webinar this Thursday. I want to show everyone the basics behind the strategy. More importantly, I want to show interested income investors how to properly manage the strategy when the net isn’t large enough to capture the range. Because if you can conservatively manage iron condors when the times are tough, you will have access to a successful income strategy into perpetuity.
OK, so what exactly is an iron condor?
It’s a non-directional options strategy designed to have a large probability of earning a limited profit.
It’s a limited risk, limited reward strategy because you know before the trade how much you stand to gain or lose. That’s a powerful concept that most investors have never considered.
Let’s go over a quick example:
The current price of SPY is $209.60.
Our range, if we use 2%: $205.41 to $213.79.
We could sell an iron condor slightly bigger than that range, say at $204 and $214 for a return of 75%. But we know, as options traders, that to make this type of return we must take much higher risks. We don’t want those types of headaches. A conservative approach that allows us to take out 5% to 10% a month is the goal. We are not trying to hit home runs.
So, by taking less of a profit we have the ability to increase our stated range significantly. We can more than double our originally stated 10-point range ($204 to $214). With our more conservative approach we can make over 15% with a 21-point range ($196-$217). And we can widen it even further if we are willing to accept a return of less than 10%.
As you can see in the chart below, it’s a large range and one that most likely will not be breached over the next 30 days.
Obviously, there is far more to the iron condor strategy than I am able to discuss here. I just wanted to give interested income investors a chance to grasp the range-bound concept that an iron condor offers, which allows us to make a return even when the market is flat.
But if you want to learn more, don’t forget to sign up for my webinar this Thursday. I will be taking an in-depth look at iron condors with five real-time trades. This will give everyone a chance to see how to properly structure and manage iron condors under different scenarios. I hope to see you all there!
Take your Portfolio to the Next Level…
A level most investors would give their right arm to achieve. Because Andy Crowder’s doing what others might consider impossible… a truly outstanding record of winning trades. 227 trades – 202 winners. That’s a win streak of 88.9% – as good as you’re likely to ever get in this – or any – market. And now, for a very limited time, you can find out exactly how he does it – and how you can do it to. Click here now for complete details.