OPTIONS
The Iron Condor Evolves
Introducing The Modidor Spread
Here’s a strategy that involves modifications to the standard iron condor spread.
The world of option trading is an ever-evolving one. While the basic strategies have been around for a long time, the search for useful adjustments and enhancements to these fundamental strategies is an ongoing process. The more closely traders look at traditional strategies, the more opportunities they are likely to find. This article details a strategy that involves modifications to the standard iron condor spread, dubbed the modidor spread.
The genesis of the modidor
One of the unique uses of options is the ability to generate income from a portfolio. Very often, investors will sell covered calls against an existing stock position. If the stock price is below the strike price of the call at the time the option expires, then the investor gets to keep his stock position as well as the premium he received when he wrote the option. Another distinctive use of options is the ability to make money even if the underlying security is going nowhere.
There are several strategies that a trader can use to attempt to achieve this objective, and among them is a strategy referred to as the condor. Specifically, we will look at a version of this strategy known as the iron condor. Essentially, the purpose of entering into an iron condor spread is to establish profitability a certain distance above and below the current price of the underlying security. Then as long as the underlying security remains within this price range, the position can earn a profit.
An iron condor is a four-legged position that involves:
- Selling an out of the money call option (selling a call option with a strike price that is above the current price of the underlying security)
- Buying a further out of the money call option (buying a call option with a strike price that is higher than the strike price of the call option sold)
- Selling an out of the money put option (selling a put option with a strike price that is below the current price of the underlying security)
- Buying a further out of the money put option (buying a put option with a strike price that is lower than the strike price of the put option sold).
Figure 1: THE FOUR LEGS OF AN IRON CONDOR. Here you see the standard neutral iron condor for Newmont Mining Corp. (NEM).