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TheStreet Open House

How to Use S&P 500 Options to Profit From the Passage of Time

NEW YORK (TheStreet) -- Most traders follow the S&P 500 Index (SPY) closely, but few equity or futures traders are able to structure trades that are profitable based solely on the passage of time. Option traders use a variety of trade structures called credit spreads to actually make the passage of time a profitable endeavor. Unfortunately there is one catch -- the price of the underlying asset has to cooperate.

What many readers may find interesting is that I structure my option portfolio around being positive-theta. This essentially means that the portfolio collects the option premium as time passes, which will be converted into profits if prices cooperate. I attempt to consistently capture close to 1% of my account value per day in positive time decay.

Read More: A Simple Options Trading Strategy That Beats the S&P 500

The answer: multiple iron condor spreads. An iron condor spread is a credit spread where a trader takes a call credit spread and a put credit spread simultaneously. In many cases, the trader expects the underlying asset to consolidate or trade in a specific range.

I have several high-probability iron condor spreads in my portfolio all the time. I trade the same trade structure using the same underlying assets over and over again. In many cases, I will have more than one iron condor spread on the same underlying asset on my books at the same time. The underlying assets that I focus my iron condor strategy around are primarily index options and index ETFs.

I trade the S&P 500 index (SPY), the Russell 2000 index (IWM), the Nasdaq 100 ETF (QQQ), and the Dow Jones Industrial Average ETF (DIA). These are just a few of the underlying assets that I trade using the iron condor strategy. I traditionally enter the trades at about 50 days to expiration, using a probability of success of around 80%. Most of the time, the broader index would have to move roughly two standard deviations from the current price at entry to create losses in my portfolio.

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Back in early July, I entered an August S&P 500 iron condor spread. It's presently boasting profits of around 10% on maximum potential risk. However, I wanted to show readers that recently I entered a September S&P 500 iron condor spread with about 50 days to expiration. The probability of success was around 80% for the trade to be profitable.

The following chart of the S&P 500 demonstrates the price range where the new September S&P 500 iron condor spread will be profitable if held to expiration.

Chart1 (1)

As can be seen above, the new September S&P 500 iron condor spread is profitable as long as the index price stays between $1,785 and $2,050. The trade was entered on July 22, in addition to the August S&P 500 iron condor spread that I was holding at the time.

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