Index Option Trader - Strategy
The core Index Option Trader strategy is primarily centered around monthly, market neutral, index option credit spreads on major index products such as the SPX, SPY, and QQQQ. This is known as an Iron Condor, which is a type of options spread trade that involves simultaneously buying and selling multiple options contracts in order to profit from a 'neutral' market movement. Iron Condors are sold at a net credit to the traders account, meaning that funds are deposited into the account once the Iron Condor is filled.
Here is a visual representation of the profit & loss chart:
As you can see from the image above, if the price of the underlying instrument (index) stays between, in this case, 40 - 50 by expiration, the net credit to the account is kept. In the case that the underlying rallies or falls outside of the two 'strikes', then the position experiences a loss.
For more information about credit spreads and Iron Condors, click here.
Each month in the Trade Report, the range of the Iron Condor is issued in the Trade Report. The trades parameters are based upon our own proprietary models that incorporate technical and fundamental analysis as well as various other factors that impact index option positions.
Money Management & Stop Loss
Iron Condors are naturally a defined risk position, meaning that there is a maximum amount one can lose built into the spread. We do not advocate holding a position if it moves against you to the maximum loss. Instead, according to our rules, we will use the lower and upper breakeven prices as a stop loss level. For instance, if price falls to and touches are lower breakeven price, we will close out of the position.
Below is an example of an actual trade issued in July 2007:
(The actual Trade Reports also include a comprehensive market commentary each month.)
July 1, 2007
Dear Subscribers,Trade Setup:
Trade: S&P 500 Index (SPX)Legs:
Sell To Open July 2007 SPX 1550 Call
Buy To Open July 2007 SPX 1555 CallSell To Open July 2007 SPX 1475 Put
Buy To Open July 2007 SPX 1470 PutPrice: $1.60 credit or better - Theoretical price at the midpoint is around $1.90 -- But due to live fills, there is about $0.20 of 'breathing' room so you can get filled. Try to execute your order near the end of the session -- roughly 3:30 - 4:00 PM EST, you usually get a faster and more efficient fill.
Max Profit: $1.60 ($160 per 1 position - 1 contract per 'leg')
Max Risk: $3.20 ($320 per 1 position - 1 contract per 'leg')
Commentary:
There is a 64% probability that the SPX options will expire within our break even range in this trade. The increase in volatility in the SPX Index has pushed up the premiums in the option. Given the higher premiums, I have chosen to sell this credit spread to take advantage of the higher premiums. Over the past several sessions, SPX has become range bound with optimal readings on a slew of technical indicators pointing towards an optimal 'market-neutral' setup. I will monitor this position for possible adjustments, depending upon the price movement of the underlying index and the volatility of the options.
Remember, if you have any questions, please feel free to contact us anytime using our form here.
