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Thursday, January 13, 2011

Iron Condor on SPX

A little late to blog about it since I opened this position on February the 11th, but still, the idea might be valid for others. After the losses in the previous plays on IBM and POT, I am moving back this month to an index, which as you know is less volatile than a single stock. The less violent the movements the better for neutral trades. I am going with the SPX this time...

The idea this time is interesting in that it is an Iron Condor with a small profitability range where I will have to adjust soon after one of the break even points is threatened. But the reason for this range is that I found some good volatility skews in the options I chose, which allowed me to have a very good risk/reward ratio.

BUY 1 SPX 1235 FEB PUT @18.00 (-$1800)
SELL 1 SPX 1240 FEB PUT @19.40 (+$1940)
SELL 1 SPX 1305 FEB CALL @8.70 (+$870)
BUY 1 SPX 1310 FEB CALL @7.10 (-$710)

CREDIT RECEIVED : $300
MAXIMUM RISK : $200
PROFITABILITY RANGE : 1237.04 to 1307.97


Look at the probability of SPX staying inside our profitability range only 42.33%. There are still 36 days till expiration day the 18th of February and the market has been steadily going up. The upper break even point will most likely be threaten soon and by that time I will add another Iron Condor only with the Puts side and the Calls side higher than this one just explained. Alternatively I could close the Calls the way they are now and substitute them by a couple at higher strike prices. It will all depend on the profitability picture I get. But by now, an initial 300/200 risk reward for an Iron Condor sounds attractive to me.

Thank God it is almost Friday!!



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