Trading Idea: Iron Condor on the SPDR S&P 500 ETF

Volatility, as measured by the CBOE SPX Volatility Index (VIX), has been losing momentum of late, falling from last fall’s peaks near 80 to early-March levels around 52, to its current perch just below the 30 mark. If you think this trend will continue during the summer, you may want to consider an iron-condor strategy in the SPDR S&P 500 exchange-traded fund (ETF) (SPY), simply known as the Spyders.

Iron Condor Trade Details:
*Sell and purchase prices derived from the bid and ask, respectively, at the time of publication.

SPDR S&P 500 ETF trading at 91.53

Bull Put Spread –

• Sell the August 84 put for $1.40 per contract
• Buy the August 83 put for $1.24 per contract
• Net credit of $0.16

Bear Call Spread –

• Sell the August 99 call for $0.74 per contract
• Buy the August 100 call for $0.57 per contract
• Net credit of $0.17

Overall credit for the spread: $0.33

In both the bull put and the bear call spread, the closer-to-the-money option is sold, resulting in a net credit on both sides of the trade. Also take note that the hypothetical trader in question is selling at the bid price and buying at the ask. If he were to establish limit orders in the hopes of trading closer to the "mid" (between the bid and the ask) – for at least one leg of the spread, then the overall credit might be a penny or two larger.

Profit/Loss Details:

The maximum profit for this iron condor is the total premium collected at the outset, or $0.33 per spread (minus commissions). Maximum profit is achieved if the SPY stays is trading anywhere between 84 and 99 at August expiration (August 21st). This is a move of more than 8% in either direction from the SPY’s current level.

Maximum loss for this trade is $0.67, or the different between the sold and purchase strike prices (in this example, 1) minus the premium collected. Finally, the upper breakeven level is $99.33 (the strike of the sold call plus the premium) while the lower breakeven is the strike of the short put minus the premium, or $83.67.

If you expect greater volatility out of the SPY or you aren’t a fan of the iron condor strategy, keep an eye on the "Trading Idea" section of www.ONN.tv for more insight, courtesy of the ONN Idea Generating Platform. The platform generates nine different strategies from the universe of optionable securities.