Markets
« GLD Mar 18 ‘16 +$100/-$95 Vertical Call Spread: 70.21% Profit Banked in 120 Days | Main | SPY Mar16 $192/$187 Vertical Put Spread: 4.51% Profit Banked in 132 Days »
Wednesday
Dec162015

SPY Dec15 Iron Condor +186P/-188P/-215C/+217C: 22.93% Profit Banked in 56 Days

The 7th trade that OptimalOptions closed was an Iron Condor on SPY, the ETF that tracks the S&P 500.

Trade: SPY Dec15 Iron Condor +186P/-188P/-215C/+217C  

Entry: $0.43 

Exit: $0.07

Return: 22.93%

Opened: 13-Oct-15

Closed: 8-Dec-15

Days Open: 56

During October equities rallied exceptionally well, having their best month since 2009. We believed that this performance was unlikely to continue for another two months, and that equities would likely struggle to make new all-time highs. At the same time however, we held the view that the Global Central Bank Put made it unlikely that the lows would be retested for a considerable amount of time.

Our views translated to SPY, the ETF that tracks the S&P 500, being highly unlikely to trade below $188 and above $213. We therefore opened our SPY Dec15 Iron Condor +186P/-188P/-215C/+217C trade. This means that we sold $188 strike SPY puts while buying $186 strike puts and also sold $215 calls while buying $217 strike calls. This resulted in us receiving our maximum profit of $0.43 as a net credit at the beginning of the trade.

If our view was correct, the spreads on both the call and put legs would narrow to $0.00 from $0.43. On the other hand, if our view was wrong and equities rallied to new all-time highs the spread on the calls leg would widen to $1.57 with the puts leg expiring worthless. Similarly, if equities began to tumble again the calls leg would expire worthless while the spread on the puts leg would widen to $1.57. Therefore our maximum loss was $1.57, the spread on each set of legs minus the net debit received. The simple payoff diagram below illustrates this.

Clearly, our downside risks were much greater than our potential returns. However, we viewed the probability of equities remaining range bound as particularly high. Thus the trade had positive risk reward dynamics as the expected losses were much lower than the expected gains.

After we opened our Iron Condor equities continued to recover and did not come close to retesting the previous lows. With the rally higher the S&P 500 came close to but ultimately failed to make a new all-time high. The highest SPY traded while our Iron Condor was open was $211.23 and the lowest $198.94, this means that the trade was always in the money.

This resulted favourably for us, as both the call and put legs of the trade had their time premium eroded. Compared to a directional play this trade clearly outperformed a short on equities, which would have lost money. However, when considered against an outright long trade over the same time period the result is more impressive, as our Iron Condor position outperformed a long SPY 10 times over. Therefore, we are particularly happy with the use of the Iron Condor strategy and the performance of the trade overall here.