With this weeks NetPicks Options Trade Of the Week we will take a look at the energy sector.
Energy has been one area of the market that has been very active for months now. We have seen really decent movement in both directions and as a result, there are many names that are showing signs of getting tired at these levels.
That doesn’t mean these names have to fall apart.
I could see us settle into a range here and get choppy and to take advantage of the sideways move, I’m looking to trade an Iron Condor on Halliburton (Symbol: HAL).
What Is An Iron Condor?
For those of you newer to options, an Iron Condor is simply selling an out of the money call spread and an out of the money put spread at the same time. We are collecting premium up front for selling this trade.
Instead of looking for a big directional move to make money on this trade we are instead looking for price to stay sideways inside of our profit window.
In this example, we will be selling the 47/48/44/43 Iron Condor using the March monthly options that have 14 days left to expiration. Breaking this trade down, we are:
- Selling the 47/48 call spread
- Selling the 44/43 put spread at the same time.
- We will be collecting $.45 or $45 per spread.
The $45 per spread is the most we can make on this trade. We get to keep this entire $45 as long as HAL stays inside of our profit window.
How Much Will We Risk On This Options Trade?
This trade will only tie up $55 of capital per spread. This is also our maximum loss on the trade. Regardless of what happens on HAL we can’t lose more than the $55 per spread. We can get this trade on 10 times and still only have $550 of risk.
Our profit window is defined by our 2 break even points.
- Break even on the upside is $47.45
- Break even on the downside is at $43.55
As long as price stays inside of $47.45 and $43.55 we make money.
5 Ways To Make Money
We make money if HAL moves up, down, or sideways as long as price stays inside of our profit window. We also make money from volatility decreasing, and from time decay adding up. As a result, we have a very high probability of success on this trade.
This is not going to be a trade that we are looking for a home run profit potential from. If we were expecting a big directional move out of HAL then we would be better off buying a long call or long put.
Since we aren’t expecting a big directional move over the next few weeks, the Iron Condor will allow me to scratch out a profit in an uncertain market environment.
I love using Iron Condors due to their great flexibility since they allow us to stay active in any different types of markets. This is another way of expanding out our playbook to make sure we get the smooth growth in our equity curve over time.
Start using these trade and I think you will begin to like them as well.