Energy Select Sector SPDR (XLE) iron condor

The Energy Select Sector SPDR (NYSE: XLE) has traded between $45 and $60 since last July as crude oil has ascended in a rising channel from $60 to $85. With market expectations finally beginning to price in the over-supply fundamentals, oil may trade between $75 and $65 for the next six weeks before the seasonal effects begin to take over and challenge the highs.

Though the high positive correlation between the ETF and the commodity is not guaranteed, this March iron condor on the XLE would likely take advantage of any range for crude between $60 and $80. Collecting 45 cents on $2-wide spreads offers a potential return on risk of 29%.

Iron Condor Trade Details:

XLE is currently trading at $54.28, roughly flat on the day.

Below are the elements (one bull put spread, one bear call spread) for this iron condor. Please note that a brokerage platform that provides for four-legged spread trading (such as OptionsHouse ) will allow the simultaneous execution of all four legs. Additionally, if you so choose, you should then be able to set a limit order for the spread as a whole, potentially securing a better credit.

Iron Condor Part I: Bull Put Spread –

• Sell the March 48 put
• Buy the March 46 put
• Net credit of $0.18 per spread

Iron Condor Part II: Bear Call Spread –

• Sell the March 59 call
• Buy the March 61 call
• Net credit of $0.27 per spread

Overall credit for the four-legged spread: $0.45

Open a free virtual trading account with OptionsHouse to build a profit/loss diagram to help visualize this trade.

Profit/Loss Details:

Maximum profit: $0.45 (the total premium collected) minus commissions.

Maximum risk: $1.55 (the difference between call strikes minus the premium collected). Return on risk is approximately 29% for this strategy.

Upper breakeven price: $59.45 (the strike of the sold call plus the total premium).

Lower breakeven price: $47.55 (the strike of the sold put minus the total premium).

More on XLE:

ETF Preview: Most Funds Soggy in Early Going – Solar Earnings Due in After-Hours

Trading an Iron Condor Strategy on the Energy Select Sector SPDR (NYSE: XLE)

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