Use Condors to Prey on This Market

I believe a condor makes sense using a shorter time horizon and combining both puts and calls. This is often referred to as an iron condor. I don't want to get too convoluted in terms here, so let's just say that all of these positions basically amount to a series of spreads, strangles and straddles. The simpler we can keep it, the better.

Come Fly With Me

I think the S&P has a good chance of knocking back and forth in this newly established range between 1155 and 1180 over the next few weeks, so I'm looking to establish a position that benefits from time decay.

But we already saw that a long butterfly, which only pays off if the market stands still, and basic short strangles come with a very lopsided risk-reward ratio. At current volatility levels, selling an S&P strangle that's one standard deviation out of the money can have a risk-reward of 8-1 or 9-1, meaning you will be risking $9 to make $1.

I need an alternative strategy that can take advantage of acceleration of time decay but doesn't require too many adjustments. This is Johnny Sokko calling his Iron Condor on my wrist radio! Can you hear me? I need to make money right away!

Our plan of attack on expectations that the S&P will be contained between 1150 and 1190 over the next four to five weeks is to do the following:

• buy the June 1120 put at $8;


• sell the June 1140 put at $13;


• sell the June 1180 call at $12;


• buy the June 1200 call at $5.

The position is thus established for a net credit of $12. This is the maximum profit that will be realized if the S&P settles anywhere between 1140 and 1180 by the June 17 expiration. What's nice is that the maximum loss is just $8, which occurs if the index breaches either of the outside wings, meaning the profit-loss ratio remains a positive 1.5 to 1. Combine this with the statistics that the profit occurs within a 40-point or 3.5% range, which, based on the S&P's 52-week historical volatility, has less than a 22% probability of surpassing in the next five weeks, and the risk-reward of the position producing a profit becomes increasingly favorable as each day passes.

Again, be aware that while the credit position still has a greater risk than the reward, by using a condor rather than a butterfly, we have expanded the range in which the maximum profit can be realized. We have also extended our break-even points. Combined, this increases the probability of realizing a profit during a shorter time frame.

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