Options Strategy, the Strangle. (Iron Condor)

Here is the chart to show the typical strangle style trade using the S&P 500 index as an example. The numbers are just arbitrary and, while may actually work they are not based on anything other than convenience.

This could be applied to any stock that has a deep enough option chain. It involves selling a call option (1130 green)above the current level (1010 orange dashed) and buying protection to cover the short call above the short (1140 red). Then doing the same with the puts in the other direction.

The dashed orange line represents the level on the day of the trade...blue vertical line. The green box is the time window to be able to place orders for the options expiring on September 18th and 30th.

As long as the S&P 500 remains within the brackets (or not too close to one side at least) then the options expire and I keep the profits. The key is to allow the short options to expire as closing the trade involves buying them back, which drives down the profit.

Trades 2 and 3 are just at different levels which would move the whole trade (call and put strike levels) up and down according to the market move, approximately 25 points in either direction. This allows the price more leeway in those directions as well as providing trades that have very short expiry times...this serves to reduce the likelihood of a move being large enough to hit the protection and create quicker returns which allows the money to be put back into play sooner...that drives the annual rate of return up.

It is worth noting that the large moves earlier in the year could have produced some losing trades as the move was fast enough to tag the bracketing options before expiry. I didn't clock any losers in that period in my back testing though. That is a good win rate as that was 28 trades to date in 2009.

I am looking forward to seeing how this works out in 2010.

The trades in the backtesting were placed on August the 4th, 18th and 24th and netted $1066 in total at the end of September without really optimizing the target profits on the trades

BTW, I am not revealing any propriety methodology here as the Optioneer system provides a variety of information in order to monitor these trades and the software allows easy setups, order placing and risk monitoring.

Jeff.