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