Option Trading Idea: PHLX Gold & Silver Index (XAU) Iron Condor

Traders seem to have differing opinions on gold and silver. As such, the PHLX Gold & Silver Index (XAU) may stay stuck in a range as the opposing forces work out their differences.

Selling an iron condor is a low-risk way to bet on a wide range-bound move in the index.

Iron Condor Trade Details:

The XAU is currently trading at $176.30.

Below are the elements (two equally wide out-of-the-money credit spreads) for this iron condor. Please note that a brokerage platform that provides for iron condor trading (such as OptionsHouse) will allow the simultaneous execution of all four legs, typically paying one spread trading commission to do so. Additionally, if you so choose, you should then be able to set a limit order for the spread as a whole, thereby securing a better credit .

Iron Condor Part I: Bull Put Spread –

• Sell the December 147.50 put for $3.35 per contract
• Buy the December 137.50 put for $1.85 per contract
• Net credit of $1.50 per spread

Iron Condor Part II: Bear Call Spread –

• Sell the December 205 call for $4.15 per contract
• Buy the December 215 call for $2.45 per contract
• Net credit of $1.70 per spread

Overall credit for the spread: $3.20 (or $320)

In both the bull put and the bear call spreads, the closer-to-the-money option is sold, resulting in a net credit on both sides of the trade and a combined credit of $320.

Profit/Loss Details:

Maximum profit for this iron condor is the total premium collected at the outset, or $3.20 per spread (minus commissions). Maximum profit is achieved if XAU is trading anywhere between the sold strikes – 147.50 and 205 – at options expiration on December 18th.

The maximum risk for this trade is $6.80, or the difference between the sold and purchase strike prices (in this example, $10.00) minus the total premium collected. Potential reward on risk for this strategy is approximately 47%.

Finally, the upper breakeven price level is $208.20 (the strike of the sold call plus the premium) while the lower breakeven price is the strike of the short put minus the premium, or $144.30. This range represents a move of 18.1% to the upside or 18.2% to the downside in XAU.

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