Stocks are going nowhere fast. I think the 12 year chart of the S&P 500 SPDRs (SPY) below says it all.
The amazing thing is that there is one simple strategy to make money in this sort of sideways market. It’s a strategy that beats both the bulls and the bears time and time again, and it’s called the ‘Iron Condor’.
I’ll explain this strategy in a second, but first I want to ask…
Why do I still hear from investment "experts" that we should be buying stocks? It’s always the same story. Buy stocks and forget about them, eventually they’ll go higher.
That’s all the mainstream media, your mutual fund advisor and your personal money manager will ever tell you.
Investment professionals would have you believe you should diversify among asset classes, pick the right stocks and average-in. They will point to charts that show if you held this asset or that asset over the last 30, 50 or 70 years you would have made healthy returns.
Could it be because the professional investment managers, mutual funds and the like don’t care about your financial future? Or is it that they are too busy trying to sell their products that they have forgotten their job is to make clients money.
If they truly cared they would use every investment tool at their disposal.
Which brings me back to the stagnant performance of the market and how you, as a self-directed investor, can learn how to make money using strategies that take advantage of range-bound markets – or any market environment for that matter – and do better than just ‘buy and hold’.
So, how do you make money when the market goes nowhere? That’s the question the experts should be asking.
The answer is simple: use the Iron Condor strategy and allow probabilities to do the work for you.
I talk about this concept repeatedly in my Options Advantage service and in several articles on the Wyatt Investment Research website. I use probability to choose my investments, but it’s also how I build a portfolio.
With probabilities on our side, we can make steady reliable gains in a sideways market with the Iron Condor.
With the Iron Condor strategy there isn’t any guessing as to which way the market moves. Because as long as it stays within a wide range, which we define, we make money.
What is 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 easier to understand in the chart below. But the key part, and the real advantage, of this trade to understand is:
You choose the price range of the trade. Increasing the range will decrease your potential profits, but will increase your likelihood of success.
I will use the Iron Condor strategy for the December 2011 expiration cycle in SPY as an example.
At the onset of the December expiration period, on November 21st, I established the range in The Strike Price (my free weekly e-letter) highlighted by the blue lines on the chart below. The blue lines define how far the S&P 500 (SPX) can move up/down before the position I recommended is in jeopardy of taking a loss. You can clearly see that this range is from $109 and $132.
The underlying SPY was trading at roughly $121.50 on November 21st when I established the December expiration cycle’s Iron Condor position. As you can see from the blue lines the range is extremely wide. The short put/call strikes are 109 and 132.
The probability of success for the trade = 85%.
This means that with SPY trading at $121.50 on November 21st, it would have to breach the 109 or 132 level by December16th – the day of December options expiration.
It would take an 8.7% move to the upside or a 10.2% move to the downside over a four-week period before the position is in jeopardy of taking a loss.
Best of all, the strategy will make 12.6% over the four-week period if it closes within the established range by December 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 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.