By John Douglas
In a recent article, I discussed an approach to trading and investing which underscores critical analysis as well as a refined philosophical perspective. In this article, I will discuss a very recent option strategy, which handled the volatility of the market quite profitably.
Given time and space, I must assume some basic level of competency in trading options. Otherwise, I would be forced to repeat material available in any options textbook.
WHAT’S IN A NAME? A GENETICALLY MODIFIED IRON CONDOR
Options traders are very familiar with the iron condor strategy. An analogy I use is a tennis match, where two players battle it out, within fixed boundaries. Technically, one would select a stock or index, and establish a combination which consists of a bear call spread and a bull put spread. In very general terms, one creates opposing forces, and confines the playing field to desired parameters. The mindset is such that one has no preference as to the “winner”, but simply hopes to charge a fee for renting out the playing field. Ideally, the game is “rained out” and there are no winners or losers.
This concept, in and of itself, is difficult for most people to understand. It means that you don’t have a dog in the fight-you are, in essence, the casino. You will always prevail on one side or the other-that’s the worst case. The management and adjustment of the uncooperative side tests the skill and imagination of the trader.
Just recently, I established an iron condor, utilizing Baidu (NASDAQ:BIDU) spreads. Now, the purist might argue that iron condors are best used on boring, low volatility stocks. That’s because such stocks, at least in theory, offer a higher probability of having both sides of the trade expire worthless. Thus one would pocket the premium accruing from both sides. Read More