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Putting Income On Cruise Control With Iron Condors

It gets the job done in about 14 seconds, but it’s not the type of options trade you should use to pay the groceries

You couldn’t miss it if you tried.  The 1966 Shelby Mustang is one of America’s most iconic muscle cars. If you’re a purist, you’ll know the difference. If you’re just sitting at a stop light, you’ll know you’re in for a challenge if you’re racing for pink slips.

Even in today’s age, the engine is an engineering marvel. 355 horsepower, 428 cubic inches of pure power under the hood. Yet despite all the muscle, the car is pretty much only built for first dates, enthusiasts and speed. You don’t take this collector’s dream to the grocery store every day.

Look at any options chain you like, and you can bet there’s a trader that’s pulled up in the equivalent of a Mustang, hoping to yield consistent profits.  Unfortunately, in today’s market – your dad’s muscle trade isn’t the way to go.

In fact, you can pick up consistent grocery-getter-like profits going with something that’s far less glamorous, but way more predictable.

It’s called an iron condor, and traders have been using it for years now to pay their bills with non-directional trades.


An options trade you can use to pay the bills

It has its own vacuum cleaner, onboard entertainment system, can seat eight and will run pretty much forever. Welcome to the Honda Odyssey. The favored minivan for moms and dads around the world. It’s not much to look at, but load it up with luggage, kids and groceries and it will get the job done on any road trip.

If beauty is in the eye of the beholder, the iron condor is the Honda Odyssey of options trades. It gets the job done consistently and doesn’t need the market to lose its mind order to generate a profit.

For whatever reason, millions of traders overlook this income-generating opportunity in favor of the more exciting long call options, or the death-defying naked puts. Who needs that kind of excitement on a Friday afternoon when contracts are about to expire?

Properly set up, the iron condor can withstand market moves and still put money in your account – because it’s about as non-directional as you can get.  Essentially just a combination of a bullish and bearish credit spread, the iron condor pays out as long as price stays within a given range.

You just need to know how to set it up and how to manage it.


Giving yourself room for error

Anyone who’s driven a minivan knows they need plenty of room to maneuver. So much so that when you make a right turn, a camera will tell you exactly what’s going on on the starboard side. (Yes, that’s a ship reference for this bus-like creature.) Moms around the world hit the gas with confidence thanks to this feature.

Flip the blinker, have a look and give price a wide berth when entering your iron condor!

You can give yourself plenty of room going into a trade, without the assistance of a camera, simply by putting the bullish and bearish credit spreads far enough apart with your iron condor trade.

A wide spread becomes even more attractive when coupled with a low volatility index. This is because indexes are not as susceptible to events that can make price go crazy – like missed earnings, fired CEOs and lost contracts. All of which can befall even the most seemingly stable of stocks.

Here’s an ‘Odyssey-like’ setup using a condor’s good friend, the SPX. Going out to the November expiration, you take positions above and below price with at least a 100-point spread. In a market that’s trending up, you can give your bearish spread (on top) more room – and go out as far as you like.

Now you just need to do what any practical, risk-averse driver would do. Find the cheapest way to execute the trade in a way that will generate the most income.


Managing your risk, while taking home profits

Any mom or dad who’s piloted the Odyssey will tell you the drama can come from anywhere, once the ship has left the station. Because of this, you need flexibility and space to keep dogs, older brothers and grumpy two-year-olds alike pacified.

The same is true with the iron condor. Thanks to the risk analyzer within ThinkorSwim, you can take a 30-second look at an iron condor and know exactly how much you stand to lose or make with the iron condor’s range.

In this case, we’ve moved from the SPX, to its much more affordable counterpart – the SPY. Now working with a fraction of the cost, we can enter a condor with the same price range and a target working-man’s income of $360 at expiration.

A quick look (below) tells the story. As long as price stays within the green box, you’re in good shape.

Give yourself a range that delivers profit consistently and pay some bills with the iron condor!

As the journey towards expiration advances, you have any number of moves you can make should price start applying pressure to either side of the trade. In this case, if the market were to make a big move up, you can simply apply a butterfly to give yourself more room to breathe – on either side, or both.

In any event, you’ve given yourself exactly what an income trade needs:  time, space and flexibility.

Limit the speed, risk and drama your account faces by adding iron condors to your trading package. It won’t be as glamorous – but you’ll pay some bills along the way.