By Steve Papale
In my mind I’m 35 but my knees scream 56. Played basketball the other night as I always do on Wednesday with my 16 and 14 year old boys. They’re big and fast and strong. Me not so much. I still remember how I could play with them and let them win when they were little. These days it’s more about watching my kids surpass their old man on basketball court. And afterwards ice packs and a hot shower.
For the past month or so the broad market has been somewhat range bound. These markets are fairly typical heading into year end, although typically there is a bullish seasonality factor. One of the most popular strategies to play range bound markets is the iron condor or just condor as it is often referred. Traders sell the condor which is made up of an out of the money call spread and an out of the money put spread. The idea is that any premium collected from the sale is kept if the market stays within a range during the life of the trade. The range is dictated by the location of the call and put spread.
For example, a more conservative trader might sell a $10 call and put spread in the SPX with the short strike delta at 10. By doing this it not only allows the market a relatively large range of movement with low gamma based on short strike location but by choosing a relatively narrow spread the overall risk of loss is limited. Of course the cost of this conservative approach is a lower credit and return. Some prefer a more aggressive structure by either selling a higher delta option, placing a wider spread or both. By doing this the trade will collect more daily theta and have a potential for greater return. The tradeoff here is higher risk in the form of larger gamma and potentially greater potential loss. In theory from a risk adjusted return standpoint, it should not matter what spread a trader chooses. A more conservative choice yields less but with less risk and a more aggressive structure has greater return potential with greater risk. Adjusting both for risk the yields should be similar. In reality however traders tend to gravitate toward whichever is more comfortable for them based on risk tolerance, capital considerations and other factors.