Going Nowhere Fast

Posted On May 18, 2015 9:26 am

Use an Iron Condor to Generate Income in a Sideways Market

While many individual names have has big earnings induced moves the broad market indices have basically gone nowhere over the past few months. The S&P 500 Index has been bound within a 3.5% range over the past three months. I’ve discussed how that index doesn’t tell the full story of underlying rotation and turbulence. But the narrowness of the indices has reached historic proportions; Dana Lyons noted, “for only the 8th time in 100 years, the Dow Jones Industrial Average (DJIA) had made it to 30 days without hitting either a 1-month high or low.”   That streak is now extended 41 consecutive days. The only longer streak in history occurred in 1910 and lasted 45 days.”  Bespoke did some data crunching to confirming we are indeed in a very rare period of market compression while enduring large intraday swings.   One day up, then one day down.

The general feeling is that the market is building towards a large directional move. But from my point of view until there is a decisive move out of the recent range it appears we can remain range bound and continue frustrate both bulls and bears. Indeed you can see that over the past few months as the SPY approaches the $207 low it bounces or at the $212 high it retreats. It would seem with Friday’s close at the highs we are poised for a new leg higher, but note how the recent move up has come on declining volume over the past three sessions.

SPY 051815

There may not be much of a bear case but the bulls also have failed to rally the troops for a new push higher.   You’ll also note the RSI stochastic is also tipping above 100 suggesting the market is overbought in the short term. Indeed, coming in Monday morning there is no follow through as stocks are trading moderately lower. At this point it’s a prove it, move it or lose it market.

With earnings out of the way, no Federal Reserve meetings until the end of July and both China and the ECB having already made their big monetary moves I don’t see many catalyst over the next few weeks.

An Iron Condor

To profit from range bound market usually means selling option premium. That might entail selling both puts and calls to create a strangle. But these positions involve selling options “naked” meaning the risk is unlimited and also the margin requirement is often prohibitively high.   To get that margin clerk off your back, and button up risk, use an iron condor strategy.

The iron condor consists of simultaneously selling both a call spread and put spread that have the same expiration dates. The position has a maximum profit of the amount of premium collected. The maximum loss is limited to the width of the spreads minus the premium collected.

Let’s look at the broad SPDR S&P 500 (SPY) for a potential trade. With the SPY at $212.50 on Friday one could sell the June Week1 205/207-214/216 condor for a $1.00 net credit.

The trade involves:

-Buy June Week1 $205 put

-Sell June Week1 $207 put


-Sell June Week1 $214 call

-Buy June Week1 $216 Call

For a $1 net credit.   These options expire June 6th .

Note, the call spread sold is closer to-the-money than the put spread. The reasoning being with the SPY currently at the top end of the range it is more likely to pull back. If it does burst through the $214 strike we’ll know we are wrong and quickly close the position for a minimal loss.

Here is the risk/reward and probabilities graph:

Sell 10 SPY 060515

The risk/reward is 1:1, which is very attractive for a position that benefits from time decay. The probability of it achieving a profit is 53% but will increase as time passes.

With the shortened trading week and light trade that usually surrounds Memorial Day Weekend we can hopefully kick back and collect money while the market goes nowhere fast.

About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.