Index Option Trader Strategy Overview
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. Don't worry, it's not as confusing at it sounds!
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 our lower breakeven price, we will close out of the position.
Below is an example of two actual trades issued. From May 2008 & July 2007:
(The actual Trade Reports also include a comprehensive market commentary each month.)
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May 5 , 2008 Dear Valued Subscriber, ***MAY SPY IRON CONDOR TRADE ALERT*** Sell to Open May SPY 145 Call Buy to Open May SPY 147 Call Sell to Open May SPY 133 Put Buy to Open May SPY 131 Put Max Profit: $0.22 or greater Max Risk: $1.78 or less % Chance of Profitability: 77.83% ORDER: TOS Autotrade/Non Autotrade: Limit @ $0.22 or better SPY Iron Condor Breakevens: 132.75 - 145.25 -------------------------------------------------- There is risk of loss trading futures and options. Trade with risk capital only. Trading options may not be suitable for all investors. Past performance is not indicative of future results. All information contained and distributed is to be used at your own risk. All users of the Service are urged to consult with their own independent financial advisors with respect to any investment. Any communication is not to be construed as investment advice for your particular investment situation.
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July 1, 2007 Trade Setup: Legs: Sell To Open July 2007 SPX 1550 Call Sell To Open July 2007 SPX 1475 Put Price: $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') -------------------------------------------------- There is risk of loss trading futures and options. Trade with risk capital only. Trading options may not be suitable for all investors. Past performance is not indicative of future results. All information contained and distributed is to be used at your own risk. All users of the Service are urged to consult with their own independent financial advisors with respect to any investment. Any communication is not to be construed as investment advice for your particular investment situation. |
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Performance Monitoring
We believe in full transparency. Pro Options Profits is our independent performance monitoring service. Index Option Trader performance records are available by visiting our performance page here.
