Three Looks at the Condor
Strike selection is essential for a successful condor. If strikes are too close
together or two far apart, the trade can become much less attractive.
Strikes Too Close
The QQQs are options on the ETFs that track the Nasdaq 100 (QQQ). They
have strikes in $1 increments, giving traders a lot to choose from. With
QQQ trading at around $55.95, consider the 54–55–57–58 iron condor. In
this example, with 31 days until expiration, the following legs can be
executed:
In this trade, the maximum profit is 0.63. The maximum risk is 0.37. This
isn’t a bad profit-to-loss ratio. The break-even price on the downside is
$54.37 and on the upside is $57.63. That’s a $3.26 range—a tight space for
a mover like the QQQ to occupy in a month. The ETF can drop about only
2.8 percent or rise 3 percent before the trade becomes a loser. No one needs
any fancy math to show that this is likely a losing proposition in the long
run. While choosing closer strikes can lead to higher premiums, the range
can be so constricting that it asphyxiates the possibility of profit.
Strikes Too Far
Strikes too far apart can make for impractical trades as well. Exhibit 10.7
shows an options chain for the Dow Jones Industrial Average Index (DJX).
These prices are from around 2007 when implied volatility (IV) was
historically low, making the OTM options fairly low priced. In this
example, DJX is around $135.20 and there are 51 days until expiration.
EXHIBIT 10.7 Options chain for DJIA.