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Trade view / 17 February 2017 at 13:30 GMT

S&P 500 iron condor trade — #SaxoStrats

Product Manager Futures and Options / Saxo Bank
Denmark
Instrument: SPY:arcx
Price target: 2350
Market price: 2350
saxo strats
 
Background

After reaching record new record highs in equities, US markets are finally pulling back with seven out of nine sectors trading lower. Yet despite this one day pullback, market strength is still in place and we are not looking to buck any trend here or call it a top. 

In fact, Russell Rhoads, Director of Education for the CBOE Options Institute, made a great point last night that strategies like butterfly spreads and iron condors tend to unperform the index, especially at time of low volatility. Moreover, as Rhoads suggested, investors could consider purchasing options at times when volatility is a record low, rather than selling options. 

However, we are looking to take advantage of small spike in volatility, but mostly to benefit from positive time delay that comes from selling two short vertical spreads. 

S&P500 trend

SPX 500
Source: Saxo Bank. Create your own charts with SaxoTrader; click here to learn more.

After a strong upward trend in US equities, we feel that with earnings report already fully priced in stocks, we might see some consolidation and range bound trading. Such a market would benefit our strategy, while further gains in equity or a sharp selloff would hurt it.

Hence, we are allowing for some some movement up and down of roughly 2% and 3% (that is, to 2,395 and 2,275) from current levels.

Management and risk description

An iron condor is a defined risk strategy. Our risk is just over 1% on the 25K income focused portfolio. 

Parameters

Strategy: Iron condor option trading

Underlying price SP 500 Index: 2,350

Status: Opening trade

Trade: Sell -1 Iron Condor SPX 100 Weeklys 7 APR 17 2395/2400/2275/2270 CALL/PUT@ 2.05

SPX IC
Note: Margin reduction of $295 per contract; prices indicative to time of trade.

Maximum gain at expiration: $2.05; Maximum loss at expiration: $2.95

Two breakeven points: 2,272.95 and 2,297.05 (subtracting/adding premium from short strikes).

Entry: Either Thursday or Friday for no less than $2 credit.

Stop: No stop.

Target: Index to trade in between short strike prices.

Time horizon:  40 days out.

— Edited by Robert Ryan

Non-independent investment research disclaimer applies. Read more
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